Source: Sharecast
Bailey said the BoE planned to conduct a "stress test" with the private equity and credit industry. An annoucement would be made before the end of this year, with the exercise completed in nine to 12 months
"Are these cases idiosyncratic or are they what are called 'the canary in the coal mine'? In other words are they telling us something more fundamental...? I think that is still a very open question," Bailey told the UK parliament's House of Lords' Financial Services Regulation Committee.
"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.”
The packaging of sub-prime mortgages - sold on the back of almost non-existent lending standards - into asset-backed bonds led to the collapse of several banks in the UK and US and hammered investors. No-one was ever jailed for the widespread malfeasance in the financial sector.
BoE Deputy Governor Sarah Breeden said the recent US failures showed 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".
The bankruptcies of car parts maker First Brands and sub-prime auto lender Tricolor, which both used private finance on a large scale led to a sharp fall in global banking shares last week, as spooked investors took flight.
JP Morgan boss Jamie Dimon last week warned of more losses linked to the private credit sector, saying more “cockroaches” could emerge.
"My antenna goes up when things like that happen. I probably shouldn’t say this but when you see one cockroach, there’s probably more. And so, everyone should be forewarned at this point,” he said during an analyst call.
The Lords committee is conducting an inquiry into the growth since 2008 of so-called private markets - finance provided to large businesses outside of normal bank lending or issuing publicly traded shares or bonds.
Reporting by Frank Prenesti for Sharecast.com
