Market News

The Bank of England is investigating the collapse of a £2bn British “shadow bank” as fears about the sector rip through stock markets.

Officials at the Prudential Regulation Authority (PRA) have requested information from lenders including Barclays that backed Market Financial Solutions (MFS), a private credit provider that was placed into administration amid allegations of fraud last week.

PRA, a division of the central bank that regulates lenders, is reportedly concerned about insufficient risk assessment and due diligence by banks of MFS and its related companies, according to the Financial Times, which first reported the news.

The PRA is also investigating whether banks have indirect exposure through lending to private capital groups that may have backed MFS independently.

A Bank of England spokesman said: “We are constantly monitoring the financial system and wider markets and stay in close contact with firms. It is the responsibility of firms to manage the risks to which they are exposed.”

The enquiries come amid a broader upheaval in the private credit sector. Shares in BlackRock tumbled by 6pc in the US on Friday after the asset manager limited withdrawals from one of its flagship private credit funds for the first time.

Blackrock’s HPS Corporate Lending Fund, which is marketed to individuals, said it would not offer redemptions above the traditional 5pc limit each quarter, despite receiving requests to redeem 9.3pc of shares in the most recent quarter.

Private credit funds, often called “shadow banks”, extend loans but do not take deposits and so are not subject to the same kind of strict regulations as banks. The sector has exploded in size since the financial crisis as banks have faced stricter regulation.

However, there are concerns about loose lending standards and the opacity of the sector. Several Wall Street leaders have expressed worries about private credit, with Lloyd Blankfein, the former boss of Goldman Sachs, saying he could “smell” a crash on the horizon and Jamie Dimon, the chief executive of JP Morgan, warning of “cockroaches” in the sector.

MFS described itself as a specialist provider of buy-to-let mortgage lending and bridging finance. It was part of a fast-growing crop of so-called bridging lenders in the UK. These firms provide short-term, property-backed loans to borrowers who may not qualify for traditional bank financing and often charge higher interest rates.

A number of large banks gave capital to MFS to lend, including Santander, Jefferies and Barclays, which has between £500m and £600m tied up in the firm.