BoE warns that growth in leveraged loans is parallel to sub-prime

The growth of new lending to those already in debt has “parallels” to the sub-prime mortgage boom which resulted in the financial crisis, according to the minutes from a discussion by the Bank of England’s (BoE) top financial stability policy-makers.

Minutes published yesterday from the financial policy committee (FPC) revealed that members, including BoE governor Mark Carney, “discussed the extent to which the growth in leveraged loans had parallels to the growth in the US sub-prime mortgage market before the crisis”.

The so-called leveraged loans, in which borrowers (usually those with poor credit) take on more debt, carrying a higher credit risk for the lender, but as a result offers a higher return, at a time when investors are searching for a yield.

The FPC minutes noted: “Risks from the US corporate sector remained material.

The committee highlighted weaker “under writing standards” and “significant uncertainty around the ultimate investors in collateralised loan obligation securitisations and hence their capacity to absorb losses”. Similar aspects strengthened the boom before the crisis it, before an increasing number of defaults triggered panic among the holders of the hard-to-value instruments.

In the United States (US), the size of the leveraged loan market is now above $1trn (£760bn), compared to $8trn in total corporate debt. Furthermore, gross debt for firms in the US increased from 254 per cent of annual earnings at the start of 2015 to 290 per cent in the spring of 2018, which the FPC said was “close to 2007 levels”.

However, in the UK, non-financial companies issued a record £38bn in leveraged loans in 2017, and have already issued £30bn in 2018. Currently a fifth of UK corporate sector debt is held by riskier firms which do not make the “investment grade” rating.

The BoE will assess the implications of the rise in leveraged loans for the banking sector in its stress test this year.

    Share Story:

Recent Stories


FREE E-NEWS SIGN UP

Subscribe to our newsletter to receive breaking news and other industry announcements by email.

  Please tick here to confirm you are happy to receive third party promotions from carefully selected partners.


NEW BUILD IN FOCUS - NEW EPISODE OF THE MORTGAGE INSIDER PODCAST, OUT NOW
Figures from the National House-Building Council saw Q1 2025 register a 36% increase in new homes built across the UK compared with the same period last year, representing a striking development for the first-time buyer market. But with the higher cost of building, ongoing planning challenges and new and changing regulations, how sustainable is this growth? And what does it mean for brokers?

The role of the bridging market and technology usage in the industry
Content editor, Dan McGrath, sat down with chief operating officer at Black & White Bridging, Damien Druce, and head of development finance at Empire Global Finance, Pete Williams, to explore the role of the bridging sector, the role of AI across the industry and how the property market has fared in the Labour Government’s first year in office.


Does the North-South divide still exist in the UK housing market?
What do the most expensive parts of the country reveal about shifting demand? And why is the Manchester housing market now outperforming many southern counterparts?



In this episode of the Barclays Mortgage Insider Podcast, host Phil Spencer is joined by Lucian Cook, Head of Research at Savills, and Ross Jones, founder of Home Financial and Evolve Commercial Finance, to explore how regional trends are redefining the UK housing, mortgage and buy-to-let markets.

The new episode of The Mortgage Insider podcast, out now
Regional housing markets now matter more than ever. While London and the Southeast still tend to dominate the headlines from a house price and affordability perspective, much of the growth in rental yields and buyer demand is coming from other parts of the UK.

In this episode of the Barclays Mortgage Insider Podcast, host Phil Spencer is joined by Lucian Cook, Head of Research at Savills, and Ross Jones, founder of Home Financial and Evolve Commercial Finance.