Bailey draws parallels to 2008 sub-prime crash
Bank of England Governor Andrew Bailey has sounded a cautionary note regarding recent turbulence in the US private credit market, drawing unsettling comparisons to the early signs of the 2008 global financial crisis. Speaking before the House of Lords, Bailey referenced the collapse of two leveraged US firms — First Brands and Tricolor — and suggested these may be early indicators of systemic fragility rather than isolated incidents.
“Are they the canary in the coalmine?” Bailey asked, stressing the need for a deep examination of the situation. “We have to be careful we’re not repeating the same mistake we made before the financial crisis when sub-prime mortgage risks were dismissed as too small to matter.”
Concerns over financial engineering and complacency
Bailey emphasized that complex financial instruments, including loan slicing and tranching, have re-emerged in private markets, reminiscent of pre-2008 practices. “Alarm bells go off,” he said. The governor also criticized the complacent tone of some private equity executives, noting similarities to the pre-crisis attitude and warning against replaying the same regulatory failures — particularly regarding credit rating agencies.
Deputy Governor Sarah Breeden added that the Bank would run a “war game” scenario to test the resilience of private credit markets. She highlighted key vulnerabilities: excessive leverage, opacity, complexity, and weak underwriting standards — factors that appeared in the recent First Brands and Tricolor defaults.
Wall Street executives and global institutions react
The defaults have also rattled Wall Street. JPMorgan CEO Jamie Dimon likened the incidents to seeing “cockroaches,” implying there may be more lurking in the shadows. “My antenna goes up,” Dimon remarked. His comments underscore the anxiety that such failures could signal broader weaknesses in credit markets.
Meanwhile, the IMF included private credit market risks in its latest global financial stability review. Managing Director Kristalina Georgieva cited the issue as one of her greatest concerns, citing the close ties between private lenders and mainstream banks as a potential fault line in the global financial system.
Systemic risks resurface in the shadows
Bailey’s comments point to a growing unease about shadow banking — financial activity outside traditional banks — which now plays a significant role in corporate financing. Without the regulatory oversight applied to mainstream banks, problems in this area could go undetected until they trigger wider instability.
Bailey concluded that the UK and global regulators must not underestimate these warning signs. “We’ve got to use these cases as another reason to have more drains up, frankly,” he said, advocating for greater transparency and risk assessment in the rapidly expanding private credit sector.
