Following Wall Street, Bank of England also warns of 'private credit distress'

BOE Governor "Concern about a financial crisis"

"Shadow banking" less regulated than banks

Rapid growth over 10 years through low-credit lending

U.S. auto parts firms' bankruptcies continue

"Following a path similar to 2008"

As risky lending practices spread in the private credit market, warnings are growing that it could become a trigger for a future financial crisis. Andrew Bailey, governor of the Bank of England (BOE) (photo left), mentioned the bankruptcies of U.S. auto parts maker First Brands and auto-loan firm Tricolor, warning that the incidents could be a harbinger of a larger crisis like a "canary in a coal mine." The CEO of U.S. regional bank Zions Bancorp, which recently suffered big losses from bad loans (photo right), also expressed concern, saying, "If there's danger in the market, it is likely in private credit."

On the 21st (local time), according to the British daily The Guardian, Governor Bailey told the Senate Financial Services Regulatory Committee, "It remains an open question whether these cases are isolated incidents or a kind of canary in the coal mine signaling a more fundamental problem." He urged vigilance by referring to the period just before the 2008 global financial crisis. Some of the asset-backed securities (ABS) issued by Tricolor were found to have maintained AAA ratings even up until just before bankruptcy.

Governor Bailey said, "We need to thoroughly examine how these structures are put together," adding, "At the time people said, 'The U.S. subprime market was small so there was no systemic risk,' but that judgment was completely wrong."

Concerns about bad loans have also been rising on Wall Street recently. Both First Brands and Tricolor were found to have raised funds in the private market under loose terms.

Jamie Dimon, chairman of JPMorgan, remarked about such cases, "If you saw one cockroach, there are probably many more." Kristalina Georgieva, managing director of the International Monetary Fund (IMF), said on the 16th, "A very large amount of funds is moving from the banking sector to non-bank financial institutions that are not strictly regulated," adding, "(This concern) keeps me up at night."

Harris Simmons, CEO of Zions Bancorp, which recently suffered large losses from bad loans, said on the same day's earnings conference call, "If there's risk in the market, it's probably in private credit," and added, "This market has grown too fast and become so large that at the very least a 'yellow flag' (warning sign) should be raised."

On the 15th, Zions announced it had set a $60 million provision related to a commercial real estate loan fund and decided to write off about $50 million of loan receivables. Immediately after this announcement, concerns about bad loans in the private credit market grew, and the next day Zions Bancorp's stock plunged by about 13% on the New York Stock Exchange.

After the global financial crisis, U.S. banking regulations were tightened, leading large banks to cut back lending to low-credit companies. As a result, the private credit market, which is less regulated than bank lending, grew rapidly over the past 10 years.

This growth was driven by investment funds seeking high yields pouring into the sector amid light regulation and opaque structures.

Reporter Im Da-yeon allopen@hankyung.com