And Bailey suggested regulators and policymakers should be on the lookout for early similarities to the strain that triggered the 2008 meltdown.
“I don’t want to sound too foreboding,” he said, “but the added reason this question is important is if you go back to before the financial crisis when we were having this debate about subprime mortgages in the US, people were telling us: ‘No, it’s too small to be systemic. It’s idiosyncratic.’ That was the wrong call.”
He drew parallels between the complexity that’s crept back into private credit markets and some of the methods used to package debt before the subprime mortgage crisis, which were seen as a key reason for the crash.
“We certainly are beginning to see… what used to be called slicing and dicing and tranching of loan structures going on, and if you were involved before the financial crisis and during it, alarm bells start going off at that point,” he said.
“That stuff was a feature of the financial crisis so that’s another reason why we’ve got to use these cases as another reason to have more drains up.”