Work

The systemic risk of leveraged and covenant-lite loan syndications

Year: 2024

Type: article

Abstract: By modelling the whole U.S. syndicated loan market as a financial network from 2000 to 2022, we find that highly connected institutions hold significant shares of leveraged and covenant-lite loans. Our analysis indicates that the size of leveraged and covenant-lite syndicated loan portfolios increases financial institutions' systemic risk, particularly during recession periods. Although banks commonly sell syndicated loans shortly after origination, our results suggest that they remain vulnerable to pipeline risk. Our study has significant implications for policymakers and regulators, as it can aid in identifying banks exposed to systemic risk associated with leveraged and covenant-lite loans and in ranking systemically important financial institutions accordingly.

Source: International Review of Financial Analysis

DOI: 10.1016/j.irfa.2024.103738

Authors: A. Sina, M. Billio, A. Dufour, F. Rocciolo, S. Varotto

Institutions: ICMA Centre, Ca' Foscari University of Venice, Nazarbayev University

Language: English

Topic: Banking stability, regulation, efficiency

Subfield: Finance

Field: Economics, Econometrics and Finance

Domain: Social Sciences

Open Access status: hybrid

Estimated APC paid: $3,490

Funder: Università Ca' Foscari Venezia