Bank of England Deputy Governor warns: Private credit faces "subprime-like" tightening risks but not at the level of a global crisis.

Sarah Breeden, Deputy Governor of the Bank of England, stated that the private credit market faces the risk of credit tightening similar to what happened in the banking industry after the financial crisis, but she also downplayed the possibility of the risk spreading on a large scale. Breeden pointed out on Wednesday that due to insufficient market transparency, the private credit sector has hidden dangers such as layered leverage and market confidence collapse. She said at a conference, "We should not let this situation drag down the banking system, but it could trigger a private credit crisis similar to the credit tightening in the banking industry." The Bank of England is leading a comprehensive stress test covering the entire industry to assess the potential impact of a global economic downturn on trillions of dollars in unlisted assets. Over 40 institutions are participating in this test. Bank of England Governor Bailey has compared the $1.8 trillion private credit market to the subprime crisis - the market has seen explosive growth in the context of tighter banking regulations. Bailey believes that in the current environment of severe market fluctuations, conflicts such as the one involving the Middle East GEO Group Inc may expose potential pressures in the private credit market. Breeden does not believe that a global financial crisis will repeat itself, but she said regulatory authorities are alert to signs of a crisis recurrence. She added that regulators are concerned that the high leverage and lack of transparency in the private credit market could trigger an economic downturn and have cascading impacts on the real economy. "The Lemon and Sausage" Dilemma "We need to clarify what the layered leverage really means," she said, "It is difficult to accurately account for the scale of this type of leverage." It is reported that related funds commonly use leverage to maintain short-term liquidity reserves and reinvest most of the funds to amplify profits. Breeden mentioned that there is a "Lemon and Sausage" problem in the market, which may affect investor behavior. "The so-called lemon problem (derived from the economic theory 'The Market for Lemons') is that investors cannot distinguish between high-quality credit and low-quality credit, so they simply choose to leave and watch from the sidelines," she explained, "It's like many people enjoying sausages, but once they know about the ingredients inside, they may have concerns." For example, the collapse of the UK mortgage lender Market Financial Solutions exposed blind spots in due diligence and regulatory oversight in the private market. The institution is accused of repeated collateralizing, with its main creditors including Banco Santander S.A. Sponsored ADR (SAN.US), Barclays PLC Sponsored ADR (BCS.US), and others. Breeden admitted that the Bank of England's stress test may not cover all the gray areas of the market, but she is "confident that the test will provide multidimensional market feedback." She also emphasized that the magnitude of the private credit market is far less than the subprime market that triggered a global economic recession and widespread defaults in 2009. "My responsibility is to assess what macroeconomic pressures may mean for this new form of credit."