Andrew Bailey says a close look is needed at the private credit market after collapse of two big US firms

The governor of the Bank of England, Andrew Bailey, has warned recent events in US private credit markets have worrying echoes of the sub-prime mortgage crisis that kicked off the global financial crash of 2008.

Appearing before a House of Lords committee, the governor said it was important to have the “drains up” and analyse the collapse of two leveraged US firms, First Brands and Tricolor, in case they were not isolated events but “the canary in the coalmine”.

“Are they telling us something more fundamental about the private finance, private asset, private credit, private equity sector, or are they telling us that in any of these worlds there will be idiosyncratic cases that go wrong?” he asked.

“I think that is still a very open question; it’s an open question in the US.”

He added: “I don’t want to sound too foreboding, but the added reason this question is important is if you go back to before the financial crisis when we were having this debate about sub-prime mortgages in the US, people were telling us: ‘No it’s too small to be systemic; it’s idiosyncratic.’ That was the wrong call.”

When a mortgage-lending frenzy ended in a housing market bust in the US from summer 2007, it kicked off a wave of financial turmoil.

Banks on both sides of the Atlantic had made high-risk bets on billions of pounds’ worth of US home loans, often funding the spree with short-term borrowing.

The resulting crisis, which rolled on for many months, eventually led to a deep recession and a string of costly bank bailouts in the US and Europe, including of RBS and Lloyds in the UK.

Bailey said the complex nature of some of the financial engineering now in use in the private credit markets had echoes of that period.

“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,” he told peers.

Read More: Bank of England chief warns of ‘worrying echoes’ of 2008 financial crisis