In the US, the collapse of two heavily indebted companies – Tricolor and First Brands – that relied on private credit prompted alarm about the opacity of the sector.
Jamie Dimon, JP Morgan’s chief executive, suggested there would be more “cockroaches” to emerge from the private debt industry after the Tricolor and First Brands crises.
The recent collapse of British company Market Financial Solutions amid allegations of fraud has stoked fears about the health of the sector and left banks that backed the company nursing hundreds of millions of pounds in losses.
Speaking at the Investment Association’s annual conference on Thursday, Mr Bailey said: “We have seen disturbances [in private credit markets].
“We shouldn’t be surprised if there are idiosyncrasies, but we do have to look carefully at the interconnectivity in the system.”
He explained that the central bank was carrying out a stress test of the $11tn private credit market for this reason and warned that there are concerns about a lack of transparency.
Mr Bailey has previously raised the alarm about private credit, drawing parallels with the kind of lending activity seen in the run-up to the 2008 financial crisis.
He has warned that banks, insurers and pension funds have become dangerously intertwined in private credit, meaning any crash could have unexpected effects on the global economy.
Mr Bailey told conference attendees: “Do the owners understand what they’ve got? It will end much more smoothly and go much more smoothly if they do.”
The central bank governor added that the rapid development of artificial intelligence was linked to the expansion of private credit markets.
However, Mr Bailey said there is a risk that markets are overvaluing the potential future returns from AI.
He warned: “We could still get market corrections because the job of markets is to value the future earnings. That’s uncertain.”