The Governor of the Bank of England has warned of “alarm bells” in the private credit market as he cautioned of consequences parallel to the 2008 global financial crisis.
Andrew Bailey told lawmakers on Tuesday the collapse of US car parts maker First Brands and auto-dealership Tricolor could be “the canary in the coalmine” as he called for crucial analysis of the debt-related failure.
Bailey questioned whether the firms’ collapse could indicate “something more fundamental in private credit markets”.
“We certainly are beginning to see… what used to be called slicing and dicing and tranching of loan structures going on and if you were involved before the financial crisis then alarm bells start going off at that point,” the bank chief told the House of Lords financial regulation committee.
First Brands and Tricolor’s woes – which spiked concerns on global private debt markets lending at high interest rates – came shortly after medium-sized Utah bank Zions Bancocorporation told its shareholders it was going to take a hit of $50m on a pair of commercial loans.
The news caused its market cap to plunge by over 13 per cent – the equivalent of nearly $1bn (£750m).
The disruption has triggered a wave of jitters with America’s most influential banker and JP Morgan chief Jamie Dimon warning of “cockroaches” in the US economy, which could lead to a financial meltdown.
Dimon warned that despite the record-smashing stock markets, there could be trouble that threatened to mirror a 2008-style crash.
He told an analyst call last week: “I probably shouldn’t say this, but when you see one cockroach, there are probably more… Everyone should be forewarned on this”.
Bailey questioned whether the latest cases were showing deeper underlining issues or that there “will be idiosyncratic cases that go wrong”.
“I think that is still a very open question… it’s an open question in the US.”
Bailey drew comparisons to the 2008 financial crisis, where he said “people were telling us: ‘No it’s too small to be systemic, it’s idiosyncratic’… that was the wrong call”.
Bank of England to review private credit market
However, despite the warning the bank was taking private credit “very seriously,” Bailey added he was not keen to regulate market.
“We have to have a system which encourages risk to be taken and investments to be made,” he said.
“My first reaction is how can we improve that… I wouldn’t go to regulation as a first answer.”
But Deputy Governor Sarah Bredeen did add the bank was planning a “stress test” of private credit, in a clear sign of the degree of concern at the bank over the risks posed by the market.
Bredeen said a new risk review would “shine a light on what’s currently opaque and try and understand the complexity”.
The “system-wide exploratory scenario” on the private credit will use a similar model to 2024’s review of risks to the UK’s financial markets.
The central bank is expected to provide more details in the coming year on the scheme with the full launch expected within nine to 12 months.
Bailey’s remarks follow the FTSE 100 suffering its worst day since April after the jitters in the US credit market spread to the City.
The news heightened already-uneasy loan exposure nerves and led to Barclays falling as much as 6.75 per cent Friday morning. The lender finished the day down 4.3 per cent. Lloyds, HSBC and Standard Chartered all lost a minimum of 2.5 per cent.
This story is being actively updated.