Andrew Bailey, the governor of the Bank of England, has warned that recent events in US private credit markets have 'worrying echoes' of the sub-prime mortgage crisis that triggered the 2008 global financial crash. Speaking before a House of Lords committee, Bailey said it was important to analyse the collapse of two leveraged US firms, First Brands and Tricolor, to determine if they were isolated incidents or 'the canary in the coalmine'.
Bailey highlighted concerns about the complex financial engineering now used in private credit markets, including the 'slicing and dicing' of loan structures, which was a feature of the 2008 crisis. He said alarm bells start going off when such practices are observed, and stressed the need to have 'the drains up' to scrutinise the sector.
The governor also expressed scepticism about reassurances from the private equity and private credit world, noting that during a meeting some months ago, industry representatives told him everything was fine apart from the role of ratings agencies. Bailey remarked, 'We're not playing that movie again are we?' referring to the lax approach of ratings agencies before the 2008 crash.
Deputy Bank governor Sarah Breeden, who appeared alongside Bailey, announced that the Bank would conduct a war game exercise in private credit markets to test linkages with other sectors. She identified key vulnerabilities: high leverage, opacity, complexity, and weak underwriting standards, which appear to have been factors in the two defaults.
The collapse of First Brands and Tricolor has prompted concern on Wall Street, with JP Morgan chief executive Jamie Dimon comparing them to 'cockroaches' and warning that more could emerge. The International Monetary Fund's global financial stability review also highlighted concerns about close connections between private credit markets and mainstream banks, with managing director Kristalina Georgieva saying it was the issue that kept her awake at night.
