HSBC on alert over fears of shadow banking crisis

HSBC has said it is on alert for a possible shadow banking crisis as concerns about the private credit industry grow.

Pam Kaur, HSBC’s chief financial officer, said on Tuesday that the bank had relatively small exposure to the private loans industry but was concerned about the “second and the third order risk” if issues start to affect the industry more broadly.

She said: “The thing that worries me most, and I have gone through crises as a chief risk officer before, is the second and the third order risk you have from your counterparties who may be impacted by a situation... so that’s what we monitor very closely.”

Ms Kaur added it was difficult to monitor the potential risks it faces from any possible meltdowns in the shadow banking industry, given much of the risk was indirect.

Concern has spread since the collapses of US car parts manufacturer First Brands, and Tricolor, an American subprime car loan lender. Both failed with little warning and were heavily reliant on private credit, a corner of finance often referred to as shadow banking.

This form of finance involves private equity and other non-bank lenders extending credit to companies.

Concerns have been raised about the lack of transparency in the $3tn (£2.2tn) market and the possibility of lax lending standards.

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This has fuelled fears that more collapses could be imminent. Jamie Dimon, the chief executive of JP Morgan, said: “When you see one cockroach, there are probably more.” JP Morgan itself recorded a $170m loss from its exposure to Tricolor.

The Bank for International Settlements – often called the central bank for central banks – warned this week that the life insurance industry may be riven with hidden risks as a result of its mounting exposures to private credit.

It warned that “many of these investments are more obscure, with information hardly obtainable in common data sources” compared to publicly traded debt.

Insurers backed by private equity have become particularly keen on “private letters”, a form of ratings which cannot be cross-checked by regulators or other analysts, the BIS warned.

“Private ratings are not publicly disclosed, which prevents external validation and facilitates rating shopping. These ratings are concentrated among smaller rating agencies, which may face commercial incentives to assign more favourable ratings,” it said.

“This opacity can lead to inflated assessments of creditworthiness and, correspondingly, undercapitalised exposures.”

Goldman Sachs: No sign it’s systemicGoldman Sachs boss David Solomon played down concerns of a systemic problem with shadow banking - Kyle Grillot/Bloomberg

David Solomon, Goldman Sachs’ chief executive, downplayed fears of a systemic shadow banking crisis on Tuesday.

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Mr Solomon, who has led the investment bank since 2018, said the recent bankruptcies of First Brands and Tricolor were “idiosyncratic events” rather than signs of a larger crisis.

In an interview with Bloomberg TV, Mr Solomon said: “I don’t see anything in the context of a handful of bad credit situations that’s leading me to say we have a systemic issue around the corner.”

He added that while an economic shock could lead to more losses on other private debt deals, “that’s different than a systemic crisis”.

HSBC and Goldman Sachs both had no direct exposure to either First Brands or Tricolor.

Ms Kaur’s comments came as HSBC reported a 14pc drop in its pre-tax profits to $7.3bn after recording a $1.1bn hit linked to Bernie Madoff’s ponzi scheme.

Herald Fund SPC, a hedge fund that was a victim of Mr Madoff’s scam, filed a lawsuit against HSBC’s Luxembourg unit in relation to the investment in 2009, before a local court rules in its favour this week. HSBC has said it will appeal the ruling.

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