Bank of England’s Bailey warns First Brands, Tricolor collapses may herald worse to come

The recent collapses of US car parts maker First Brands and auto dealership Tricolor may be a warning of much bigger financial problems to come and the Bank of England plans a more detailed probe, governor Andrew Bailey said on Tuesday (Oct 21).

Bailey told lawmakers that there were parallels with the early stages of the global financial crisis and that the central bank planned to run a “stress test” with the private equity and credit industry. “Are these cases idiosyncratic or are they what are called ‘the canary in the coal mine’? In other words are they telling us something more fundamental...? I think that is still a very open question,” Bailey told the House of Lords’ Financial Services Regulation Committee.

Bailey said the BOE planned to conduct a “system-wide exploratory scenario” with banks, insurers, private equity companies and other non-bank lenders.

BOE deputy governor Sarah Breeden said the BOE expected to make a more detailed announcement before the end of the year and complete the exercise in nine to 12 months.

“We can see the vulnerabilities here, the opacity, the leverage, the weak underwriting standards, the interconnections. We can see parallels with the global financial crisis. What we don’t know is how macro-significant those issues are,” she told the parliament committee.

The exercise would be voluntary, as the central bank does not directly regulate many of the firms involved. Shares of some US banks have fallen in recent weeks due to exposure to the bankruptcies of First Brands and Tricolor, which relied heavily on private finance.

The House of Lords committee is looking at the growth since 2008 of so-called private markets – finance provided to large businesses outside of normal bank lending or issuing publicly traded shares or bonds.

Bailey said he was concerned about potential conflicts of interest from private finance companies buying life insurers which then bought assets owned by the private finance companies. REUTERS