By Huw Jones
LONDON (Reuters) -The Bank of England said on Tuesday that very few banks had a clear idea of their "holistic" exposures to private equity, putting them at risk of a "large loss", and set an August deadline to identify how gaps would be filled.
The central bank had already announced it was taking a deep dive into what it sees as opacity on leverage and valuations of assets, particularly following a rise in interest rates, in the world's $8 trillion private equity sector which has extensive funding links with banks.
Rebecca Jackson, the bank's executive director for authorisations and international supervision, set out some of her initial findings on Tuesday, saying banks were weak at aggregating their data on private equity exposures to get an overall picture of risks.
She also sent a letter to a select number of chief risk officers of banks on Tuesday, setting out what standards she expects them to meet in terms of assessing overall exposures to private equity.
"The finding that I would like to focus on today is that only a very small number of banks can consistently aggregate data in a manner that is appropriate to their exposures to the private equity sector," she told an event held by UK Finance.
"The overall risk here is that when banks fail to properly measure and assess their aggregate exposures, and in the absence of a defined risk appetite framework and board engagement, it’s very easy to develop an outsized and concentrated exposure that leaves one open to the risk of a large loss."
There is a need for significant improvements at many banks, she said.
"It’s clear that these need to happen now," she said.
Jackson said banks must provide detailed plans by Aug. 30 on plugging data gaps, with follow-up action depending on the responses.
"I don't underestimate the challenge, and I don't underestimate the fact that this may take time," Jackson said.
The Bank has already said that regulatory changes would need to be done at the international level given the cross-border nature of private equity.
The speech follows a broader view from the BoE on Monday on the role of private equity, its links to banking and concerns that opacity on leverage in the $8 trillion global sector raises.