Bank Of England Warns Of Junk Debt Crisis Risk

The Bank of England warned exposure to junk debt could lead to another subprime mortgage-style meltdown
The Bank of England has warned the $1.4trn risky loan market could lead to another fallout similar to the US subprime mortgage crisis that contributed to the 2008 Global Financial Crisis.
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.
Will ABS market ever escape being tagged as driver of GFC?
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.
More news
Back to Top
What A Rising VIX Means For Pension Funds
Wall Street’s latest selloff has moved beyond a technology-sector wobble and become a broad market event. The Nasdaq C... Read more
Behaviour Cannot Fix A Portfolio Construction Flaw
A Retiree Shouldn't Be Asked to Behave Their Way Out of a Portfolio Construction Problem Why behavioural coaching shoul... Read more
Behavioural & Retirement Portfolio Resilience
Behavioural Survivability and Retirement Portfolio Resilience Why the lived experience of market recovery matters as mu... Read more
Australia's Rate Rise Bites: Highest In 15 Years
The Reserve Bank of Australia has lifted interest rates to their highest level since 2011, and its governor admits the w... Read more
October Retirement Portfolio Resilience Assessment
Markets stabl Read more
Gyrostat September Retirement Portfolio Resilience Assessment
September Retirement Portfolio Resilience Assessment Markets have fallen. The price of risk has risen. ... Read more