Andrew Bailey, the Governor of the Bank of England, has warned that the crisis in the $3 trillion shadow banking industry has echoes of the 2008 global financial crisis. In comments to the House of Lords financial services regulation committee, Mr Bailey said private credit lenders were engaged in the same kind of financial engineering as banks were in the run-up to the crisis.
Mr Bailey said he was beginning to see “what used to be called slicing and dicing and tranching of loan structures” in the private credit market, adding that “if you were involved before the financial crisis or during it, alarm bells start going off at that point.” Tranching refers to dividing up the cashflow from a loan repayment and packaging it with others to make new products that can be sold on to investors.
The Governor said the Bank of England was taking the risk that the recent high-profile collapses of two US companies, First Brands and Tricolor, which had borrowed billions from the private credit market, could prove to be a “canary in the coal mine” very seriously. To guard against this risk, Mr Bailey said the Bank was considering carrying out a “system-wide exploratory scenario”, or stress-test, to examine how the market would cope with any issues.
His comments will fuel concerns about the health of the private credit market, which is often referred to as “shadow banking”. Shares in US banks and money managers with exposure to the market have been falling sharply in recent weeks due to fears of other potential problems lurking in the opaque sector.