9 March 2026: Shadow banks leave the UK ‘more exposed to sudden shocks’

The rapid rise of so-called 'shadow banks' is making the financial system more vulnerable to extreme shocks, the Bank of England Governor has again warned.

It follows a spate of corporate collapses on both sides of the Atlantic that have raised fears about the unregulated £8.3 trillion private credit market.

Private credit has grown rapidly as a source of funding for firms and households after big banks retreated from riskier lending following the 2008 financial crisis.

But the rapid demise of subprime vehicle finance provider Tricolor and car parts maker First Brands in the US has fuelled concerns that more 'cockroaches', as JP Morgan’s boss Jamie Dimon called them, could be lurking in the non-bank sector.

Bank of England Governor Andrew Bailey warned 'alarm bells' were ringing before London mortgage broker MFS fell into administration last month.

MFS was a specialist, non-bank lender that provided bridging loans and buy-to-let mortgages.

The Bank of England recently launched a system-wide stress test to assess how the non-bank sector, including private equity buyout firms, would respond to a major financial shock and the impact on big banks and the wider economy. Its final report is not due until early next year.

But in an internal blog for Bank of England staff, two of its experts said the 'growing presence' of shadow banks renders the financial system more susceptible to severe downturns because of their high exposure to debt markets.

The findings, which are the authors' and do not represent the Bank's official position, are based on interest rates rising one percentage point in response, for example, to a spike in inflation due to higher oil and gas prices.

Non-banks would no longer be able to act as a spare tyre, filling the lending gap left by big banks, because their own borrowing costs would soar, according to the blog.

20% of private credit needs refinancing this year and 42% by late 2028, investment bank Investec noted recently, making the sector particularly exposed to rising interest rates.

Credit rating agency Fitch warned that private credit has begun to show 'bubble-like attributes'.

Last week, money manager BlackRock became the latest firm to limit withdrawals from one of its private credit funds after a surge in redemption requests.

In another report, the Bank of England has blamed Labour's punishing tax raids and minimum wage hikes for driving up youth unemployment.

Huw Pill, the Bank's chief economist, told MPs that while it was hard to calculate the impact of the policies on the wider workforce, they have had a 'particular effect' on young people.

It comes after figures showed youth unemployment has soared to an 11-year high of 16.1% under this Government. That compares to a rate of 5.2% for the wider workforce, though that is also at a five-year high.

Pill expressed his concern about the trend and the fear that being left on the job's scrap heap could cause widespread damage.

Bank of England Governor Andrew Bailey told the committee that the youth unemployment rate is far too high, it has gone up far more rapidly than the overall level, and this needs to be investigated and remedied.

It comes after Labour staged a £25 billion raid on employers' National Insurance last year, raising the rate paid by firms and reducing the salary threshold at which they start to pay it. The effect has been to make it much costlier to employ part-time or low-paid staff.

Meanwhile, the Government has also sharply hiked minimum wages, with larger increases for under-21-year-olds bringing them closer to the rate paid to older workers. That has also deterred employers from taking a chance on hiring younger people.

The pound saw increased volatility as the markets reacted to the likely effect of any long-term conflict in the Middle East. It fell to a low of 1.3253, rebounded to close only marginally lower at 1.3419.

Kansas City Federal Reserve President Jeff Schmid said on Friday he ‌believes the advent of artificial intelligence is leading some businesses to pause hiring, even as an ageing population is creating real structural change in the labour market.

"Between fiscal policy and just the nature of the ​baby boomer class retiring ​out, we have a real structural ‌thing ⁠going on," Schmid said. "AI's got a lot of different elements to it, ​but ​there are people and ⁠businesses in particular who are starting to ​pause. Their thinking is “We're taking ​a ⁠pause before we hire the next person to say, ⁠' What ​is the ​skill set we need?"

Meanwhile, the Cleveland Fed President Beth Hammack signalled that the FOMC may be forced to weigh tighter monetary policy later this year if inflation progress stalls, even as a cooling labour market adds a new layer of complexity to the Fed’s dual mandate.

The US lost 92k jobs in February, an unexpected major weakening in the labour market that came just before Donald Trump threw the global economy into upheaval with his conflict in Iran.

The unemployment rate edged up to 4.4% in February. In comparison, the US added a revised 126k jobs in January, far surpassing expectations of 70k but still below January 2025.

Economists had predicted an increase of 60k jobs added in February and a steady unemployment rate of 4.3%.

The report revised down job figures from December and January. Figures in December went down by 65k, from +48k to- 17k. January saw a much smaller drop, revised down by 4k jobs, from 130k to 126k.

“The job market is struggling in the face of so many headwinds. Companies are cautious about hiring, and some industries are experiencing layoffs. The February jobs report was dismal, with heavy job losses, even in healthcare, and a rise in the unemployment rate, according to several market analysts.

Because the data was released on Friday and is solely focused on jobs in February, it does not capture the global shock waves caused by the US-Israel conflict with Iran. But the jobs data will be influential in shaping the US Federal Reserve’s upcoming meeting over interest rates on 17 and 18 March.

The cut that was already considered likely now has an added urgency. Although the conflict is likely to lead to inflation rising, several members of the Committee may see the need to cut rates as the spectre of stagflation rises in the markets.

The poor unemployment report, coupled with the conflict in Iran, led to market volatility, rising to its highest level in several months. This is mostly due to traders and investors having to decide what will have the greatest effect on the economy. Those differences of opinion will drive volatility even higher.

The dollar index saw its rise tempered last week as the jobs data created more doubt about the future path for interest rates. The index had reached a high of 99.68 but fell back on Friday in reaction to the job numbers, closing at 98.96.

ECB Executive Board member Isabel Schnabel has cautioned that the escalating conflict in Iran poses significant upside risks to inflation within the Eurozone. Speaking at the 2026 United States Monetary Policy Forum in New York, Schnabel said that while the ECB remains in a “good place,” geopolitical tensions, particularly concerning energy markets and shipping routes, could disrupt the ongoing disinflationary process.

Schnabel highlighted that the conflict in the Middle East, specifically Iran, presents a tangible threat to price stability in Europe. The primary markets of concern are energy, which are vulnerable to supply disruptions, and critical shipping routes, which are facing increased security concerns.

Data suggests that conflicts in and around the Middle East lead to significant increases in oil prices, a development that concerns policymakers aiming to stabilise inflation around the 2% target.

Europe’s reliance on imported oil and gas makes it particularly susceptible to geopolitical crises affecting energy supplies.

While efforts have been made to diversify energy sources and increase renewable capacity, sudden supply disruptions can still affect production costs across industries.

Schnabel emphasised the need for the ECB to remain vigilant and to monitor key indicators such as inflation expectations, wage trends, and the extent to which businesses pass higher costs on to consumers. This suggests greater hesitancy from the Central Bank regarding interest rate cuts in the near future, altering the playing field for market participants who had anticipated a more straightforward easing cycle driven by the need to increase growth.

Speaking in Turkey, which remains on the fringes of the conflict, despite being targeted by at least two Iranian missiles last week, European Central Bank President Christine Lagarde warned that the global economy is moving from a period of risk into a new era of uncertainty, where traditional forecasting models are increasingly inadequate.

Lagarde said the ECB would maintain monetary policy flexibility amid rising geopolitical tensions. Her remarks, published on the European Central Bank's website, emphasised that interest-rate decisions will continue to be taken on a meeting-by-meeting basis, guided by incoming economic data.

The Central Bank does not make decisions based on the likely outcomes of geopolitical events, preferring to focus on the actual effects.

Lagarde said the current global environment differs from past periods of manageable risks, arguing that macroeconomic models calibrated to the relatively stable conditions of previous decades are no longer sufficient to guide policy decisions.

Inflation is a bigger concern than economic growth as the European Central Bank assesses the implications of the war in Iran, according to Governing Council member Joachim Nagel.

The extent to which higher energy prices and trade disruption will hurt the Eurozone will depend on how long the war continues, the Bundesbank President told Bloomberg Television.

Concluding this point is difficult as the situation remains “very volatile.”

Members of the ECB’s Governing Council appear to have similar views on the outcome of the conflict. They appear to accept that the joint U.S./Israeli strikes will achieve their physical goals. Still, it remains uncertain what effect this will have on the hearts and minds of Iranians who were informed yesterday of the identity of their new Supreme Leader.

No one is certain of what Mojtaba Khamenei will see as Iran’s strategic position, although he is unlikely to react to Trump’s demand for unconditional surrender.

The Euro experienced further weakness last week but managed to remain above its short-term level of support, around the 1.15 level. It reached a low of 1.1530 and closed at 1.1606. However, it has opened lower in early Asian trading this morning.

Have a great day!