BoE governor warns ‘alarm bells’ ringing over private credit market

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Bank of England governor Andrew Bailey has said “alarm bells” are ringing over risky lending in the private credit markets following the collapse of First Brands and Tricolor, as he drew a parallel with practices before the 2008 financial crisis.

Testifying before the House of Lords’ financial services regulation committee on Tuesday, Bailey said: “We certainly are beginning to see, for instance, 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.”

He added that it was “still a very open question” whether the recent
failures of US car part supplier First Brands and subprime auto lender
Tricolor were “the canary in the coal mine”, and whether they indicated
“something more fundamental” in private credit markets.

The failures of Ohio-based First Brands and Dallas-based Tricolor in recent weeks have sharpened scrutiny of the often opaque private credit markets. They have become a critical source of funding for consumers and businesses as traditional banks have retreated since the financial crisis.

Both companies made use of asset-backed debt, with Tricolor bundling up subprime car loans into bonds and First Brands tapping specialist funds to provide credit against its invoices.

Wall Street’s practice of packaging subprime mortgages into asset-backed bonds fuelled the 2008 financial crisis, with years of loose lending standards leading to a crash in the value of these assets when US house prices fell.

In the run-up to the crisis, bankers and investors had regarded many of these complicated financial products as virtually riskless. The perception encouraged large institutions to borrow heavily against their holdings, exacerbating the scale of the losses during the crisis. 

Bailey told the committee that the BoE was considering conducting a “system-wide exploratory scenario” next year to test how the private credit market would manage in a crisis.

Additional reporting by Robert Smith in London