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Rise in risky business lending echoes build-up to 2008 financial crisis, Bank of England warns

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  • 18/10/2018
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Rise in risky business lending echoes build-up to 2008 financial crisis, Bank of England warns
The Bank of England has raised the alarm over the boom in borrowing to indebted businesses.

 

The increased role of non-bank lenders and changes in the distribution of corporate debt could pose a risk to the UK’s financial stability, the bank’s Financial Policy Committee (FPC) found.

The committee warned the growth of debt across the world and particularly in the US corporate sector, “had parallels to the growth in the US subprime mortgage market before the crisis”.

Policymakers added that global leveraged loan market was “larger than – and was growing as quickly as – the US subprime mortgage market had been in 2006” while underwriting standards had weakened.

The UK corporate sector has been influenced by global debt market conditions, with high investor demand also driving growth in these types of loans, along with lower underwriting standards, the FPC said.

Leveraged loans by UK non-financial companies had reached a record level of £38bn in 2017 and a further £30bn had already been issued in 2018.

The committee said it would assess implications from the surge of borrowing for UK banks in the 2018 stress test in December.

At the same time, the FPC said it is continuing to monitor the risks of Brexit on financial services for households and businesses.

But added that it judged the UK banking system to be strong enough to withstand a “disorderly, cliff-edge Brexit”.

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