The Bank of England governor said “alarm bells” are sounding over loans in private credit markets, which have echoes of the subprime mortgage crisis that led to the 2008 financial crisis.  

“Riskier corporate borrowing in financial markets such as private credit and leveraged lending is particularly vulnerable in the current environment,” Andrew Bailey told the Lords Financial Services Regulation Committee.  

The governor’s comments follow share slides among some US banks in recent weeks due to their exposure to the bankruptcies of car parts supplier First Brands and subprime auto lender Tricolor, which relied heavily on complex and hidden loans from private finance firms. 

Deputy Bank governor Sarah Breeden, appearing alongside Bailey, said: “We can see the vulnerabilities here, the opacity, the leverage, the weak underwriting standards, the interconnections.  

“We can see parallels with the global financial crisis. What we don’t know is how macro-significant those issues are.” 

Bailey said the Bank would carry out a “system-wide exploratory scenario” to test the linkages between private credit and UK banks, insurers, private equity companies, and pension fund investors. 

The governor pointed out that the central bank was beginning to see the “slicing and dicing and tranching of loan structures” in the financial markets. 

“Alarm bells start going off at that point,” he added. 

Bailey said it was an “open question” whether the collapse of First Brands and Tricolor were one-offs, or representative of wider systemic failings. 

The governor added: “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? 

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

Last week, JPMorgan Chase chief executive Jamie Dimon warned that markets should be alert after the failure of these two firms. 

Dimon said: “My antenna goes up when things like that happen,”  

“And I probably shouldn’t say this, but when you see one cockroach, there are probably more . . . Everyone should be forewarned on this.” 

Breeden said the Bank would make a more detailed announcement before the end of the year and complete the exercise in nine to 12 months. 

She added the tests would be voluntary, as the central bank does not directly regulate many of the firms involved.