Could private credit be the 'canary in the coalmine' bringing about a global lending meltdown?
The Bank of England's governor has flagged potential risks to the global financial system from the collapse of two US private credit lenders, noting similarities between the failure of those companies and the conditions that led to the 2008 global meltdown.
Andrew Bailey told the House of Lords Financial Services Regulation Committee in the UK that the failures of car parts supplier First Brands and subprime auto lender Tricolor should be examined carefully to determine whether they were isolated incidents or early signs of deeper vulnerabilities in private finance. He described the collapses as a possible “canary in the coalmine,” echoing early warnings that preceded the 2008 global financial crisis.
Bailey said it remains an “open question in the US” whether the events at First Brands and Tricolor point to firm-specific problems or to structural weaknesses in private credit markets. Both companies relied on asset-backed funding models, with Tricolor packaging car loans into bonds sold to investors and First Brands securing financing from specialist private funds.
The governor drew parallels between recent developments in private credit and the financial practices that contributed to the 2008 crash. “We certainly are beginning to see what used to be called slicing and dicing and tranching of loan structures going on,” he said. “If you were involved before the financial crisis and during it, alarm bells start going off at that point.”
Bailey recalled that before the subprime mortgage crisis, regulators and investors had dismissed early warnings as isolated cases. “People were telling us it was too small to be systemic. That was the wrong call,” he said. He added that the Bank intends to study the current cases carefully as part of its ongoing monitoring of non-bank financial markets.
Deputy governor Sarah Breeden, appearing alongside Bailey, said the central bank would conduct a “system-wide exploratory scenario” to test how stress in private credit markets could spread to other sectors, including banks, insurers, and pension funds. She said several private credit and private equity groups had agreed to participate in the voluntary exercise.
Breeden said the recent failures exposed vulnerabilities related to leverage, opacity, and weak underwriting standards, which she described as consistent with earlier discussions about potential fragilities in non-bank lending. “We can see the parallels with the global financial crisis,” she told the committee.
Global regulators have also expressed concern about the sector. The International Monetary Fund recently noted that US and European banks have about $4.5 trillion in exposure to hedge funds, private credit firms, and other non-bank institutions, warning that such connections could amplify shocks within the financial system.
