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Treasury ministers have come under fire from an influential group of peers for failing to grasp the risks of Wall Street’s shadow banking bubble.
On Thursday, the House of Lords’ financial services regulation committee heavily criticised the Government for having “demonstrated a limited grasp” of the risks posed to the financial system from the private markets boom.
The report said the Treasury had an attitude of “passivity”, which was all the more surprising given the potential risks to the UK’s financial stability from shadow banking and private markets.
The rapid growth of private credit, which is corporate loans made by non-bank lenders, has raised concerns about its stability and the potential impact of a crash on the wider financial system.
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Concerns about weakening lending standards were fuelled last year by the collapse of two US companies – First Brands, a car parts supplier, and Tricolor, a subprime auto lender.
Jamie Dimon, the head of JPMorgan, warned that more “cockroaches” would emerge because of lax lending standards over the years.
Lord Hollick, a member of the committee and former boss of media giant UBM, said: “The Treasury itself needs to be curious about this and needs to be actively engaged in looking for this and finding this information and giving us their view because obviously a lot of savers’ money, pension funds and insurance companies are going to be tied up with this.
“Heaven forbid that anything should go wrong, but clearly it’s of sufficient size and importance for the Treasury also to take a careful look at it.”
While the Lords committee praised the work of the Bank of England, led by Andrew Bailey, it warned that the Treasury appeared to defer to the Bank, with limited engagement with the issue itself.
The report concluded that there was not enough information to conclude whether private markets were “systemic” – in other words, whether they could pose a risk to the wider financial system.
In particular, it praised the Bank for its plan to conduct the world’s first “stress test” of the shadow banking sector to see how it would cope with a global shock.
The exercise will run over two rounds, with results expected to be published in early 2027.
While tougher regulations for banks following the financial crisis have boosted their resilience, they have also pushed some of their traditional lending activities outside the more regulated banking sector.
Britain’s private market has grown by 56pc since 2015 to $185bn (£138bn) and is the second-largest after the United States, the report said.