The governor of the Bank of England, Andrew Bailey, has said that recent events in US private credit markets have worrying echoes of the sub-prime mortgage crisis in 2008

The Governor of the Bank of England, Andrew Bailey, has cautioned that recent turmoil in U.S. private-credit markets bears unsettling similarities to the sub-prime mortgage crisis that triggered the 2008 global financial meltdown.

Speaking before a House of Lords committee, he stressed the need to “have the drains up” and examine the failures of two highly leveraged U.S. firms, First Brands and Tricolor Lights. He warned they might not be isolated incidents, but rather “the canary in the coalmine”.

He asked: “Are these telling us something more fundamental about the private-finance, private-asset, private-credit, private-equity sector, or are they simply idiosyncratic failures in those worlds?” He admitted the answer is “still a very open question; it’s an open question in the U.S.”

He added: “I don’t want to sound too gloomy — but the reason this is so important is that, before the financial crisis, when we were debating U.S. sub-prime mortgages, people told us: ‘No, this is too small to be systemic; it’s just idiosyncratic.’ That turned out to be the wrong call.”

When the U.S. housing-loan boom collapsed in the summer of 2007, it unleashed a financial storm. Banks on both sides of the Atlantic had wagered heavily on U.S. home loans — often using short-term borrowing to finance them. The ensuing crisis, which stretched over many months, culminated in a deep recession and a series of costly bank bail-outs in the U.S. and Europe (including in the U.K., for instance RBS and Lloyds Banking Group).

Bailey pointed out that some of the complex financial structures now appearing in the private-credit space resemble those seen in that earlier crisis: “We are certainly beginning to see, for instance, what used to be called slicing and dicing and tranching of loan structures — and if you were involved then, alarm bells start ringing.”

“That kind of activity was a feature of the financial crisis, so this is yet another reason why we have to have our drains up,” he told the peers. He also made it clear he wasn’t reassured by the complacent attitude of some industry players: “I sat in a session with people from the private equity and private credit world some months ago who told me everything was fine in their world — apart from the ratings agencies — and I said: ‘We’re not playing that movie again, are we?’”