Leveraged loan risks concentrated in handful of banks – FSB

US lenders make up 55% of exposures among global banks

Banks have about $1.7 trillion of exposures to leveraged loans and collateralised loan obligations (CLOs), although the lion’s share is held by just a few big lenders, mainly in the US.

Lenders in the US had around $931 billion of exposures, those in the eurozone $383 billion, those in Japan $252 billion and those in the UK $138 billion, according to data published by the Financial Stability Board (FSB).

Direct exposures to leveraged loans made up the biggest share of the total, with 80.2%, followed by direct CLO holdings (12.1%), ‘pipeline’ loans to be sold into CLOs (6%) and funding to CLO sponsors (1.6%).

For those banks with leveraged loan exposures, the average ratio of these to Common Equity Tier 1 (CET1) capital was roughly 60%, and the median ratio around 46%. Global systemically important banks (G-Sibs) had a slightly larger average ratio of 60.5% and median ratio of 47.5%.

Total CLO and leveraged loan exposures across the global financial system was $3.2 trillion. Banks made up about 43% of this total, not including their pipeline and CLO funding exposures. 

What is it?

The FSB published on December 19 a report on ‘Vulnerabilities associated with leveraged loans and collateralised loan obligations’. It analyses how the growth of the leveraged loan and CLO markets could affect financial market stability.

The data above was extracted from 59 banks as of end-2018.

Why it matters

The FSB found that today’s leveraged loans are riskier than in prior years and lack creditor safeguards, though the absence of these are not being fully reflected in pricing. The Bank of England came to the same conclusion recently. 

In an economic slowdown, such loans could suffer big losses, which in turn could spark an investor panic, transmitting risk throughout the financial system. 

That these exposures appear concentrated in large systemic lenders is a concern as these banks are deeply enmeshed in the financial system. A leveraged loan-inspired panic at one such firm could, therefore, spread losses around the world.  

Get in touch

Sign up to the Risk Quantum daily newsletter to receive the latest data insights.

Let us know your thoughts on our latest analysis. You can drop us a line at louie.woodall@infopro-digital.com or send a tweet to @RiskQuantum.

Tell me more

UK banks could withstand leveraged loan crisis

CLO stress test shows losses for US insurers could top $6.9bn

EU alternative funds hold €17bn of CLOs

View all regulator stories

Only users who have a paid subscription or are part of a corporate subscription are able to print or copy content.

To access these options, along with all other subscription benefits, please contact info@risk.net or view our subscription options here: http://subscriptions.risk.net/subscribe

You are currently unable to copy this content. Please contact info@risk.net to find out more.

You need to sign in to use this feature. If you don’t have a Risk.net account, please register for a trial.

Sign in
You are currently on corporate access.

To use this feature you will need an individual account. If you have one already please sign in.

Sign in.

Alternatively you can request an individual account here