UK banks are leaving themselves open to “severe, unexpected losses”, by failing to properly measure how exposed they are to the $8tn private equity industry, the Bank of England has warned. In a speech on Tuesday, Rebecca Jackson, a senior executive at the central bank, said there was a “creeping sense of complacency” among lenders, who – despite a boom in loans and financing to the sector – had almost no ability to put together data “or even appreciate its crucial importance”. She said the issue was partly due to the fact that banks had not previously been exposed to a private equity downturn. Under the private equity model, large sums are borrowed from banks to finance the purchase of businesses, with profits from those businesses then relied on to make interest payments on the loans. It means banks could be accruing huge and unintentional exposures to the private equity industry, which would be unable to immediately sell assets to pay down loans in a crisis. “It’s not difficult to imagine a scenario, such as malpractice at a financial sponsor or the bankruptcy of multiple portfolio companies, where risk correlations increase significantly and liquidity evaporates, leaving banks open to severe,...