Bank Of England Warns Of Junk Debt Crisis Risk

New research, from the Bank's November financial stability report has revealed exposure to leveraged loans that fund the most debt-ridden companies was around $405bn.

The collatorised loan obligations (CLOs) are largely held by banks, insurers and pension schemes and the Bank said the risky loans have fuelled a rise in corporate leverage.

The news that the debt boom could "amplify economic downturns" and lead to "deeper recessions," as stated in the report, has caused concern among policymakers at the US Federal Reserve and European Central Bank, according to The Telegraph.

Last week, Bank of England governor Mark Carney warned MPs that ­leveraged loans have "all the hallmarks" of the subprime mortgage bubble which triggered the global financial crisis.

He said in a treasury committee hearing on Wednesday that he was concerned about the "rapid" pace of growth in the market.

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This growth has been driven by investors searching for higher returns in the current low interest rate environment. Central banks and credit ratings agencies have said heightened ­demand for the loans has led to a huge deterioration in investor protections.

Covenant-lite loans now account for 80% of loans and ­investors must prepare for lower ­recovery rates in a default, according to Moody's. Analysts have also said the dominance of these loans will lead to a much longer default cycle in the next economic downturn.