<div id="readability-page-1"><div><div><p>Andrew Bailey has raised the alarm about a potential “shadow banking” crisis that could send shock waves through the global financial system.</p><p>The Financial Stability Board (FSB), which is chaired by the Bank of England Governor, warned in a new report that traditional banks, insurers and pension funds had become potentially dangerously intertwined with the $2tn (£1.4tn) private credit market, often dubbed shadow banking.</p><p>The shadow banking industry is where companies borrow from funds and private equity houses rather than banks. It has expanded rapidly in recent years as regulators around the world have tightened the rules governing mainstream banking.</p><p>However, the FSB, which works with central banks and governments around the world, warned that the private credit market had not been tested by a severe economic downturn, meaning any shock could result in unexpected consequences throughout the financial system.</p><p>John Schindler, the secretary general of the FSB, warned that private credit<strong> </strong>“could amplify stress in adverse scenarios, posing broader risks to financial stability”.</p><p>He added that it was difficult to monitor the true risks posed by the sector because data was so patchy. Mr Schindler said there were “significant data challenges preventing an accurate assessment of the total outstanding size of private credit markets and of the vulnerabilities that this sector contains.”</p><p>The warning came a day after HSBC announced a $400m hit tied to the collapse of Market Financial Solutions (MFS), a British shadow bank that collapsed amid allegations of fraud this year.</p><p>HSBC said the loss came after it backed another institution thought to have lent to MFS, highlighting how risk can spread throughout the financial system.</p><p>Mr Schindler said: “Unlike public markets, valuations in private credit are updated less frequently and involve greater discretion. This can create uncertainty, particularly during periods of stress, when conditions can change rapidly.”</p><p>He added: “The lack of transparency affects not only authorities, but also investors in many cases.”</p></div></div><div><div><p>“Risks may be mispriced and vulnerabilities may go undetected” because of a lack of transparency and information on loans, Mr Schindler said.</p><p>The FSB said available evidence showed private credit borrowers typically have larger debts than companies that rely on mainstream banks and debt markets, and were more likely to fail to pay their loans.</p><p>Mainstream banks have around $220bn of direct exposure to the private credit market, but the true scale of connection could be much larger, the FSB said.</p><p>It warned that the shadow banking industry is also heavily concentrated in a few regions, including the UK and funnels its loans to just a small group of industries, including tech. It means a relatively limited shock in a specific region or industry could trigger a sector-wide crisis.</p><p>Mr Bailey has repeatedly warned about possible risks arising from shadow banking, including suggesting that private credit had echoes of the complex financial engineering seen in the run-up to the 2008 crash.</p><p>Speaking to the House of Lords financial services regulation committee last October, Mr Bailey said: “We certainly are beginning to see, for instance, what used to be called slicing and dicing and tranching of loan structures going on, and if you were involved before the financial crisis, then alarm bells start going off at that point.”</p><p>The Governor has separately suggested losses in the private credit industry could undermine public trust in the financial system.</p><p>Speaking to the European Parliament last month, Mr Bailey said: “There is a risk that when investors start to observe more of these instances [of collapses], it begs a bigger question about their confidence in the system as a whole.”</p></div></div><div><div><p>His warning followed the high-profile of two US companies, First Brands and Tricolor, which had both borrowed billions of dollars through private credit and were judged to be healthy by the industry shortly before their collapse.</p><p>London-based MFS collapsed into administration in February amid what a judge called “very serious” allegations of fraud.</p><p>Administrators have warned that the sale of a property empire belonging to MFS could potentially “flood the market” and pull down property prices in high-end areas of London. The warning highlights another example of how a crisis in the private credit market could have unexpected knock-on effects across the economy.</p><p>AlixPartners, which is managing part of the collapse of Market Financial Solutions (MFS), said it was taking advice from Knight Frank on how to sell off MFS’s properties without crashing the market.</p></div></div></div>

00005

HSBA

HSBC

HSBH

<p>Andrew Bailey, Governor of the Bank of England, has raised concerns about the risks posed by the shadow banking sector, which has become intertwined with traditional financial institutions. The Financial Stability Board (FSB) warns that the $2 trillion private credit market could amplify financial stress during economic downturns, with significant data challenges hindering risk assessment. Recent events, including HSBC's $400 million loss linked to the collapse of Market Financial Solutions, underscore the potential for widespread financial instability. Bailey has likened current private credit practices to those preceding the 2008 financial crisis, raising alarms about public trust in the financial system.</p>

- Andrew Bailey has raised alarms about a potential crisis in the shadow banking sector, warning it could disrupt the global financial system.  
- The Financial Stability Board highlighted that traditional financial institutions are increasingly interconnected with the $2 trillion private credit market, which has not been stress-tested against severe economic downturns.  
- Concerns include mispriced risks and a lack of transparency in private credit, which may lead to significant vulnerabilities and could provoke a broader financial crisis if certain regions or industries face shocks.

Andrew Bailey raises alarm over ‘shadow bank’ risk