The Governor of the Bank of England said lending in private credit markets had sounded “alarm bells”, echoing the subprime crisis that led to the 2008 financial crisis.
Andrew Bailey told the House of Lords Financial Services Regulation Committee: “Riskier corporate borrowings in financial markets such as private credit and leveraged loans are particularly vulnerable in the current environment.”
The governor’s comments came after the stock prices of some U.S. banks, which relied heavily on complex and hidden loans from private financial firms, were hurt by the bankruptcies of auto parts supplier First Brands and subprime auto lender Tricolor.
“We can see the loopholes, the opacity, the leverage, the weak underwriting standards and the interconnections here,” said Sarah Breeden, the bank’s deputy president who attended with Bailey.
“We can see parallels with the global financial crisis. We don’t know how big the macro implications of these problems are.”
Bailey said the BoE would conduct “system-wide exploratory scenarios” to test the links between private credit and UK banks, insurance companies, private equity firms and pension fund investors.
The governor noted that the central bank is starting to see “fragmentation and fragmentation of loan structures” in financial markets.
“That’s when alarm bells started ringing,” he added.
Bailey said it was an “open question” whether the collapse of First Brand and the Tricolor was a one-off or represented a wider systemic flaw.
The governor added: “Are they telling us something more fundamental about the private finance, private assets, private credit, private equity sector, or are they telling us that in any of those worlds, there are going to be special circumstances where things go wrong?
“I think it’s still a very open question and an open question in the United States.”
Last week, JPMorgan CEO Jamie Dimon warned that markets should remain wary following the collapse of the two companies.
“When something like this happens, my antenna goes up,” Dimon said.
“I probably shouldn’t say this, but when you see one cockroach, there’s probably more… and everyone should be forewarned about that.”
Breeden said the central bank would issue a more detailed announcement before the end of the year and complete the work within nine to 12 months.
She added that testing would be voluntary because the central bank does not directly regulate many of the companies involved.
