The rapid rise of so-called ‘shadow banks’ is making the financial system more vulnerable to extreme shocks, Bank of England insiders have warned.
It follows a spate of corporate collapses on both sides of the Atlantic that have raised fears about the unregulated £8.3 trillion private credit market.
Private credit has grown rapidly as a source of funding for firms and households after big banks retreated from riskier lending following the 2008 financial crisis.
But the rapid demise of subprime vehicle finance provider Tricolor and car parts maker First Brands in the US has fuelled concerns that more ‘cockroaches’ – as JP Morgan bank boss Jamie Dimon called them – could be lurking in the non-bank sector.
Bank of England Governor Andrew Bailey warned ‘alarm bells’ were ringing before London mortgage broker MFS fell into administration last month.
MFS was a specialist, non-bank lender that provided bridging loans and buy-to-let mortgages.
Concern: Bank of England Governor Andrew Bailey warned ‘alarm bells’ were ringing before London mortgage broker MFS fell into administration
Its failure has left Barclays and Santander facing losses of over £2 billion on their loans to MFS.
The Bank of England recently launched a system-wide stress test of how the non-bank sector, including private equity buyout firms, would deal with a major financial shock and the impact it would have on big banks and the wider economy. Its final report is not due until early next year.
But in an unofficial blog for Bank of England staff, two of its experts said the ‘growing presence’ of shadow banks ‘renders the financial system more susceptible to severe downturns’ because of their high exposure to debt markets.
The findings, which are the authors’ and not the Bank’s, are based on interest rates rising one percentage point in response, for example, to a spike in inflation due to higher oil and gas prices.
Non-banks would no longer be able ‘to act as a spare tyre’ and fill the lending gap left by big banks because their own borrowing costs would soar, the Bank Underground blog said.
A fifth of private credit needs refinancing this year and 42 per cent by late 2028, investment bank Investec noted recently, making the sector particularly exposed to rising interest rates.
Credit rating agency Fitch warned that private credit was showing ‘bubble-like attributes’.
On Friday, money manager BlackRock became the latest firm to limit withdrawals from one of its private credit funds after a surge in redemption requests.
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