Bank of England launches probe into £2bn shadow lender's downfall

Bank of England Probes Collapse of Major UK Shadow Lender

The Bank of England has launched an inquiry into the downfall of a British shadow banking firm valued at £2 billion, as concerns about the private credit sector unsettle financial markets.

Regulators at the Prudential Regulation Authority (PRA) have sought details from banks such as Barclays, which supported Market Financial Solutions (MFS). MFS, a private lender, recently entered administration following fraud allegations.

According to a report by the Financial Times, the PRA—a branch of the central bank overseeing financial institutions—is worried that banks may not have properly evaluated the risks or performed adequate due diligence regarding MFS and its affiliates. The regulator is also examining whether banks might be indirectly exposed through loans to private investment groups that may have independently funded MFS.

“We continually monitor the financial system and broader markets, maintaining close communication with firms. Ultimately, it is up to these firms to manage their own risk exposure,” a Bank of England spokesperson stated.

Wider Turmoil in Private Credit

This investigation comes amid broader instability in the private credit industry. On Friday, BlackRock’s shares dropped 6% in the US after the company restricted withdrawals from one of its main private credit funds for the first time.

The HPS Corporate Lending Fund, managed by BlackRock and targeted at individual investors, announced it would not allow redemptions beyond the usual 5% quarterly cap, despite requests to redeem 9.3% of shares in the latest quarter.

Private credit funds, often referred to as “shadow banks,” provide loans but do not accept deposits, meaning they are not subject to the same stringent regulations as traditional banks. Since the global financial crisis, the sector has expanded rapidly as banks have faced tighter oversight.

However, the industry’s lack of transparency and relaxed lending criteria have sparked concerns. Prominent Wall Street figures have voiced their apprehensions: former Goldman Sachs CEO Lloyd Blankfein remarked that he could “sense” a looming crash, while JP Morgan’s chief executive Jamie Dimon warned of hidden dangers in the sector.

Inside the MFS Collapse

MFS positioned itself as a specialist in buy-to-let mortgages and short-term bridging loans. It was among a rapidly growing group of UK lenders offering quick, property-backed financing to borrowers who might not qualify for standard bank loans, typically at higher interest rates.

Major banks, including Santander, Jefferies, and Barclays, provided funding to MFS. Barclays alone reportedly has between £500 million and £600 million invested in the company.

Private investment firms such as Apollo’s Atlas SP Partners and Castlelake also supplied capital to MFS. Some of these investors may have used borrowed funds from banks to finance their loans to the failed lender.

Last week, a court ordered MFS into administration amid fraud accusations, with estimates suggesting a deficit of up to £930 million on its balance sheet.

Reports indicate that investors first noticed financial discrepancies in November. Barclays, which also handled MFS’s banking operations, froze the company’s accounts in January.