The Bank of England is investigating banks' exposure to Market Financial Solutions after the UK mortgage lender collapsed amid fraud allegations, threatening losses exceeding £2 billion. The Prudential Regulation Authority is examining whether creditors performed adequate risk assessments before lending to MFS and its sister companies linked to a property scandal involving a Bangladeshi politician.

Regulators are particularly concerned about insufficient due diligence on MFS's 'complex, property-backed lending' consisting of short-term bridging loans. The BoE's scrutiny follows last year's implosions of US companies Tricolor and First Brands Group, which sent shockwaves through private credit markets. Officials have requested information from major banks including Barclays about their lending exposure.

The collapse has intensified fears about underwriting standards in asset-backed lending, a market increasingly funded by lightly regulated private credit providers. A court placed MFS into administration last week amid accusations of double-pledging collateral, with the shortfall in backing estimated at £930 million. The BoE recently announced plans for the world's first major stress test of private capital markets to assess potential risks to UK financial stability.