Deputy governor for financial stability sees a possible 'private credit crunch' ahead if the sector suffers a further downturn
Warnings from Bank of England decisionmakers about the underlying risks posed to the UK economy by growing private credit strain intensified this week as a top official drew comparisons between the current situation and the fallout from the 2008 banking crisis.
Deputy governor for financial stability Sarah Breeden said at a Financial Times conference in London on April 22 that weakness in the fast-growing private credit sector could ultimately morph into a “crunch” similar to the banking chaos seen during the 2007-08 global financial meltdown.
Much higher capital and liquidity levels than in 2008 mean the traditional banking system should be able to withstand such a shock, Breeden said, although a downturn would still likely cause significant turbulence.
“We shouldn’t be in a situation where this brings down the banking system, but it might cause a private credit crunch in the way we had a banking credit crunch,” she said.
Bank leaders have already weighed in over the past year on the growth of a sector that has ballooned in size over the last decade. By 2025, global private assets had swelled to around $3 trillion (USD), according to estimates cited by governor Andrew Bailey, with the UK deeply intertwined through fund managers, pension schemes and institutional investors.
Bailey has warned that the failures of several US private lenders and mounting losses on riskier loans could prove a “canary in the coalmine” for a broader downturn, drawing parallels with early subprime mortgage problems that were initially dismissed as contained.
The governor has also flagged the re-emergence of the same kind of slicing, dicing, and tranching of loans that pervaded structured credit markets before 2008, saying that those developments should set “alarm bells” ringing.
“If you go back to before the financial crisis when we were having this debate about subprime mortgages in the US, people were telling us: ‘No, it’s too small to be systemic. It’s idiosyncratic,’” he told a House of Lords committee in October. “That was the wrong call.”
And last week, he said private credit “becoming a much bigger problem” could worsen the effects of the Iran war and wreak havoc on global financial markets.
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