The UK’s top financial regulator warned that a sharp rise in global rates will likely lead to a fall in the value of private assets. It also confirmed that it is looking at the risks that are building up in sectors like real estate.
Nikhil Rathi confirmed last week in a report that the Financial Conduct Authority was planning to conduct a review on valuations used by private markets. This is due to growing concerns about the impact of increased rates.
“The macro-economy has emerged from a long period of low rates and the markets now expect. . . Rathi added. At some point you could expect that the risk would crystallise into asset valuations.
Rathi mentioned commercial real estate, as one of the areas that could be problematic. He cited “what is happening in China”, with developers struggling to meet mounting liabilities and property companies’ shares being severely hit.
Rathi continued, “We have also witnessed over the years the growth in private markets, private equity and leverage on these markets.”
We’re looking at this from a risk-management perspective to understand how valuations are managed and how they might affect other parts of financial system, be it banking, insurance, or elsewhere.
Rathi added that the work of international regulators in the area of leverage outside the traditional bank sector is also crucial to better understand the market. He said that private markets are particularly challenging, because different jurisdictions possess different information-collection powers. “Some can access them, while others cannot.”
The Financial Stability Board (FSB), a global group of policymakers, regulators and financial experts, has formed a new group to investigate leverage in non-bank institutions. This group includes hedge funds, private equity firms, insurance companies and others.
Rathi stated that the group will “identify the areas where there are gaps in data and the international community must address them”.
Klaas Knot (FSB Chair) said last week that the project could limit the amount of money that hedge funds are able to borrow and increase transparency about how much debt they owe banks.
The FCA chief spoke after the regulator’s public annual meeting. He, Ashley Alder, and their other executive and nonexecutive directors defended FCA’s performance in dealing with issues such as the British Steel Pension Crisis, and the ongoing fallout of fund manager Neil Woodford’s investment business.