Warning of the risk of a repeat of the 2008 financial crisis

VTV.vn - BoE Governor Andrew Bailey warned that fluctuations in the US private credit market could signal the risk of a repeat of the 2008 financial crisis.

Bank of England headquarters in London. Photo: Getty Images/TTXVN

Bank of England (BoE) Governor Andrew Bailey has warned that recent events in the US private credit market are reviving concerns about the subprime mortgage crisis that sparked the global financial crash of 2008.

Speaking to a House of Lords committee, Mr Bailey stressed the need for “careful examination” and analysis of the collapses of two highly leveraged US companies, First Brands and Tricolor, to determine whether they were isolated events or “harbingers of bigger risks”.

“I don’t want to be too pessimistic, but the reason this is important is that before the 2008 financial crisis, when people were discussing subprime mortgages in the US, they thought they were too small to have a systemic impact and were isolated cases. That was a misjudgment,” Mr. Bailey warned.

The crisis, which originated in the US mortgage boom, triggered a wave of global financial turmoil in 2008. Banks on both sides of the Atlantic made high-risk bets on billions of pounds of home loans, often financed with short-term borrowing. The result was a deep recession and a series of costly bank bailouts in the US and Europe, including RBS and Lloyds in the UK.

Mr Bailey said the sophisticated financial techniques being used in the private credit markets today were reminiscent of that era. He also pointed to the lax approach of previous rating agencies, which relied on banks’ internal models to assess product risk, as a key factor in the 2007-2008 crisis.

BoE Deputy Governor Sarah Breeden said the bank would conduct a financial war game in private credit markets to test the links with other sectors. “The problem is high leverage, lack of transparency, complexity and weak credit assessment standards. These factors have been discussed as sources of vulnerability in the financial system and appear to have contributed to these two defaults,” she said.

The recent collapse of auto parts company First Brands and auto lender Tricolor has raised concerns on Wall Street, and the International Monetary Fund’s global financial stability report last week also highlighted concerns about the close links between private credit markets and banks.

Source: https://vtv.vn/canh-bao-nguy-co-tai-dien-khung-hoang-tai-chinh-2008-100251022081417053.htm