Ben Bernanke, the Chairman of the US Federal Reserve, has become the most prominent critic of the banking industry’s appetite for financing highly leveraged private equity deals.

Mr Bernanke gave warning yesterday that piling so much debt into some deals posed “significant risks”, particularly if the US or other big economies ran into trouble if hefty loan repayments became difficult to meet.

“I urge banks to closely evaluate the risk that they’re taking, not only in the context of a highly liquid, benign financial environment, but in one that might conceivably be less liquid and benign,” Mr Bernanke told an audience in Chicago. “There are some significant risks associated with the financing of private equity. We are looking at that. We do think it’s very important for banks to be quite aware of the risks associated with the financing of private equity.”

Mr Bernanke joins a chorus of concern that private equity firms are overpaying for businesses because they are sitting on an unprecedented mountain of investment capital. The increasing competition among buyout firms for deals is pushing up the prices of the companies they buy, and the banks are happily making bigger and bigger high-margin loans to help to finance the deals.

In the UK, Anthony Bolton, the influential Fidelity stock-picker, gave warning this week that banks were heading for disaster by recklessly lending huge sums to private equity firms. Mr Bolton said: “I think the phrase is ‘covenant lite’, but in many cases it appears to mean no covenant at all.”

Such loans enable borrowers to bypass many of the safeguards that protect against the possibility of default.

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