The Governor of the Bank of England, Andrew Bailey, has warned that the recent collapse of two US companies may be an early sign of deeper problems within the global financial system, describing the development as setting off “alarm bells.”
Speaking before the House of Lords financial services regulation committee, Bailey said the failures of car parts supplier First Brands and subprime car lender Tricolor should be taken “very seriously,” drawing parallels with warning signs that preceded the 2008 global financial crisis.
“It’s unclear whether these are isolated cases or what I call the canary in the coal mine,”
“Are they telling us something more fundamental about the private finance and private assets sector? That’s still a very open question , and one we must take seriously.”Bailey said
The Bank of England governor added that the central bank would soon conduct a “stress test” on private equity and credit firms to assess potential vulnerabilities in the market.
The collapse of the two US firms has sparked renewed scrutiny of the private credit market where companies borrow from non-bank lenders amid concerns about the quality of such deals.
Bailey cautioned that some private credit loans were showing signs of the same risky practices seen before the 2008 crash, stressing a return of “slicing and dicing” and “tranching of loan structures.”
“If you were around before the financial crisis, the alarm bells start going off at that point,” he said while recalling that policymakers once underestimated the risk posed by subprime mortgages, a mistake that fueled the 2008 meltdown.
Echoing Bailey’s concerns, Sarah Breeden, the Bank’s Deputy Governor for Financial Stability, said the institution would closely monitor developments in private finance.
“We can see the vulnerabilities here,we can see parallels with the global financial crisis,” she said.
In another development, CEO of JPMorgan Chase,Jamie Dimon, , issued a similar warning last week suggesting that the collapse of First Brands and Tricolor might indicate broader instability.
“When you see one cockroach, there are probably more,” Dimon told analysts, hinting that more financial distress could follow.
