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Britain’s top financial regulator warned on Wednesday that a sharp rise in global interest rates could lead to lower private asset valuations and confirmed it was investigating the build-up of risks in sectors such as real estate.
Nikhil Rathi, chief executive of the UK’s Financial Conduct Authority, confirmed a Financial Times report last week that the agency was planning to regulate the industry amid growing concerns about the impact of rising interest rates on the industry. A comprehensive review of private market valuations.
“The macro economy has emerged from a prolonged period of low interest rates, and markets are now expecting … higher rates for a longer period,” Ratti said. “At some point, you might expect that risk will materialize in asset valuations.”
Ratti identified commercial real estate as one of the areas of potential difficulty, pointing to “what’s happening in China,” where developers are struggling under rising debt and real estate company stock prices have been hit hard.
“We’ve also seen over the years the growth of private markets, private equity and the use of leverage in those markets,” Ratti added.
“We look at it from a risk management perspective to understand where risk accumulation may occur, how valuations are managed and how that feeds back to other parts of the financial system, such as banks, insurance or financial institutions. Elsewhere.”
Ratti said the work of international regulators leveraging outside traditional banking was also key to better understanding the market. “Private markets are particularly challenging because different jurisdictions have different powers to collect information in these markets,” he said. “Some people can touch them, some people can’t.”
The Financial Stability Board, a global body of policymakers and regulators that spans hedge funds, private equity, insurance and other companies, has convened a new working group to investigate leverage at non-bank financial institutions.
Rathi said the working group, which will be co-chaired by FCA head of markets Sarah Pritchard, will “identify where data gaps exist and where the international community needs to address”.
Financial Stability Board chairman Claes Nott told the Financial Times last week that the work could ultimately limit the amount hedge funds can borrow and increase transparency about the debt they owe banks.
The FCA boss was speaking after the regulator’s annual public meeting, where he, chairman Ashley Alder and other executive and non-executive directors defended the FCA’s handling of the UK Steel pension crisis and fund collapse. The record was defended on issues such as continuing impact. Manager Neil Woodford’s investment business.
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