Bank of England governor warns of financial crisis ‘alarm bells’
Bank of England governor Andrew Bailey has said the tranching and trading of loan structures in the private credit sector today rings ‘alarm bells’ for their similarity to the practices that led to the 2008 financial crisis.
Speaking to the Lords financial services regulation committee, Bailey said the recent collapse of two big US firms – Tricolor and First Brands – could suggest parallels with the early days of the crisis.
The crisis began when banks and investors took huge losses on risky mortgage-backed securities after the US housing bubble burst.
The collapse of major financial institutions triggered a global credit freeze, deep recession, and massive government bailouts to stabilise the economy.
“I think the big question today is are these cases idiosyncratic, or are they what I call the canary in the coalmine?” Bailey said.
“In other words, are they telling us something more fundamental about the private finance and private assets sector?”
“I think that’s still a very open question in the US. I think it’s a question we have to take very seriously,” he said.
He went on to speak about the ways in which loan structures were being traded, cautioning that the behaviour of traders echoed that of those at the height of the bubble in 2008.
“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 and during it, alarm bells start going off at that point,” Bailey said.
“That stuff was a feature of the financial crisis, so that’s another reason why we’ve got to use these cases as another reason to have more drains up, frankly.”
Bailey told the committee he was unnerved by the relaxed attitude of those involved in the private equity and private credit sectors, as well as concerned about the ability of ratings agencies to accurately and independently rate products being traded.
The Bank of England plans to conduct war games to assess the risk of a private credit sector crash and the exposure of other sectors in the UK to this risk.
