THE BANK of England has sounded a warning about £31bn in loans that have been made to companies with high levels of debt this year.
The Bank’s Financial Policy Committee (FPC) says it is concerned about this growth in lending to risky UK businesses.
It also warned that these loans are being securitised in the financial markets, a practice that echoes some of the behaviour that led to 2008’s financial crisis.
“The global leveraged loan market is larger than – and growing as quickly as – the US subprime mortgage market was in 2006,” the FPC warned.
“Leveraged loans are typically sold to non-bank investors (including to collateralised loan obligation funds), whose ability to sustain losses without materially impacting financing conditions is uncertain.
“However, banks retain some exposure and make other loans to the same highly indebted companies.”
The FPC said it would assess any implications in its looming stress tests for the major lenders, with the results due in December.
The committee also warned that the European Union needs to do more to protect cross-border financial services from the risks of a no-deal, or cliff-edge, Brexit.
It said that insurance, derivatives and the transfer of data could face disruption after the UK’s departure from the bloc.
“There has been considerable progress in the UK to address these risks, but only limited progress in the EU,” said the FPC.
“In the limited time remaining, it is not possible for companies on their own to mitigate fully the risks of disruption to cross-border financial services.
“The need for authorities to complete mitigating actions is now pressing.”