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Central bank draws parallels to 2008 financial crisis in warning about leveraged loans.

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Richard Partington Economics correspondent
@RJPartington
Wed 17 Oct 2018 15.08 BST Last modified on Wed 17 Oct 2018 15.25 BST.

The Bank of England has issued a stark warning over the rapid growth in lending to indebted companies around the world, drawing parallels with the US sub-prime mortgage market that triggered the 2008 financial crisis.

Threadneedle Street said Britain was not immune from a global boom in risky lending that had alarmed financial regulators around the world this year, with the US market for such loans more than doubling since 2010 to surpass $1tn (£763bn).

“The global leveraged loan market was larger than – and was growing as quickly as – the US sub-prime mortgage market had been in 2006,” the central bank said of the rapid growth in leveraged loans, which are defined as loans to firms that already have debts worth more than four times their earnings.
The Bank’s financial policy committee (FPC), set up after the crisis to assess the risks to UK financial stability, noted that lending standards were falling and that it would more closely monitor the risks to Britain.

Though far from the scale of the US market, which is the largest in the world, gross issuance of leveraged loans by UK companies reached a record £38bn in 2017, while a further £30bn has been issued so far this year.

Taken together with high-yield bonds, which are debts of firms with weaker credit ratings, the Bank estimates the total stock of debt to riskier firms in Britain was worth about a fifth of all lending to UK companies.

 

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