Featured Product

    FSB Report Studies Vulnerabilities Related to Leveraged Loans and CLOs

    December 19, 2019

    FSB published a report that assesses the financial stability implications of developments in the leveraged loan and collateralized loan obligations (CLO) markets. The report first provides an overview of the leveraged loan and CLO markets and describes recent developments in these markets. It then discusses the potential vulnerabilities inherent in leveraged lending and the securitization of these loans, before finally assessing the possible financial stability implications. The report provides a global perspective by combining available data and analyses from FSB members.

    Markets for leveraged loans and CLOs have grown significantly in recent years, with the majority of issuance concentrated in the U.S. and to a lesser extent the in EU. The securitization of leveraged loans through CLO issuance, which had come to a halt almost entirely between 2009 and 2010, exceeded the pre-crisis levels in 2014 and has remained strong since then. While most leveraged loans are originated and held by banks, and banks have the largest exposure to the market, the role of non-bank financial institutions has increased. The report concludes that:

    • Vulnerabilities in the leveraged loan and CLO markets have grown since the global financial crisis. Borrowers’ leverage has increased; changes in loan documentation have weakened creditor protection; and shifts in the composition of creditors of non-banks may have increased the complexity of these markets.
    • Banks have the largest direct exposures to leveraged loans and CLOs. These exposures are concentrated among a limited number of large global banks and have a significant cross-border dimension.
    • A number of non-bank investors, including investment funds and insurance companies, are also exposed to the leveraged loan and CLO markets.
    • Given data gaps, a comprehensive assessment of the system-wide implications of the exposures of financial institutions to leveraged loans and CLOs is challenging.

    As at December 2018, banks have the largest direct exposure to leveraged loans and CLOs. This is not surprising, as banks fulfill various roles in, and are a critical component for the functioning of, these markets. Both public and supervisory data indicate that banks’ exposure to leveraged loans and CLOs is highly concentrated in a limited number of global systemically important banks (G-SIBs). According to supervisory data, as of end 2018 banks in the Euro Area, Japan, UK, and U.S. are estimated to have direct exposures of nearly USD 1.368 trillion to leveraged loans through credit facilities, typically in the form of drawn and undrawn revolvers. Of this amount, USD 760 billion is held by U.S. banks, USD 348 billion by Euro area banks, USD 140 billion by Japanese banks, and the remaining USD 120 billion by UK banks.

    Using supervisory and market data, the report identifies the direct holders of roughly 79% of leveraged loans and 86% of CLOs. Little is known, however, about the direct exposures of certain non-bank investors to these markets. Including their holdings of lower-rated CLO tranches. FSB will consider whether there is scope to close data gaps, will continue to analyze the financial stability risks, and will discuss the regulatory and supervisory implications associated with leveraged loans and CLOs.

     

    Related Links

    Keywords: International, Banking, Insurance, Securities, G-SIB, Financial Stability, Leveraged Lending, Collateralized Loan Obligations, FSB

    Related Articles
    News

    EC Consults on PSD2 and Open Finance; EU Reaches Agreement on DORA

    The European Commission (EC) published a public consultation on the review of revised payment services directive (PSD2) and open finance.

    May 11, 2022 WebPage Regulatory News
    News

    EC Mandates ESAs to Propose Amendments to SFDR Technical Standards

    The European Commission (EC) has issued two letters mandating the European Supervisory Authorities (ESAs) to jointly propose amendments to the regulatory technical standards under Sustainable Finance Disclosure Regulation or SFDR.

    May 11, 2022 WebPage Regulatory News
    News

    EBA Examines Supervisory Practices, Issues Deposits Reporting Template

    The European Banking Authority (EBA) published its annual report on convergence of supervisory practices for 2021. Additionally, following a request from the European Commission (EC),

    May 11, 2022 WebPage Regulatory News
    News

    US Agency Publications Address Basel, Reporting, and CECL Developments

    The Farm Credit Administration published, in the Federal Register, the final rule on implementation of the Current Expected Credit Losses (CECL) methodology for allowances

    May 09, 2022 WebPage Regulatory News
    News

    SEC Extends Comment Period on Climate Risk Disclosures

    The U.S. Securities and Exchange Commission (SEC) looks set to intensify focus on crypto-assets and cyber risk and extended the comment period on the proposed rules to enhance and standardize climate-related disclosures for investors.

    May 09, 2022 WebPage Regulatory News
    News

    APRA Reduces Committed Liquidity Facility, Issues Other Updates

    The Australian Prudential Regulation Authority (APRA) announced reduction in the aggregate Committed Liquidity Facility and issued an update on the operational preparedness for zero and negative market interest rates.

    May 09, 2022 WebPage Regulatory News
    News

    CMF Consults on Basel Rules, Presents Roadmap to Address Climate Risks

    The Commission for the Financial Market (CMF) in Chile published capital adequacy ratios (as of February 2022, January 2022, and December 2021) for 17 banks and for the banking system.

    May 06, 2022 WebPage Regulatory News
    News

    PRA Issues Statement on NPEs and Policy on Trading Activity Wind-Down

    The Prudential Regulation Authority (PRA) issued a statement on the European Banking Authority (EBA) guidelines on management of non-performing exposures (NPEs) and forborne exposures.

    May 06, 2022 WebPage Regulatory News
    News

    EBA Updates Standards for 2023 Benchmarking of Internal Approaches

    The European Banking Authority (EBA) updated the implementing technical standards that specify the data collection for the 2023 supervisory benchmarking exercise in relation to the internal approaches used in market risk, credit risk, and IFRS 9 accounting.

    May 06, 2022 WebPage Regulatory News
    News

    EIOPA Responds to Stakeholder Views on Blockchain in Insurance

    The European Insurance and Occupational Pensions Authority (EIOPA) published a feedback statement on the responses received to the consultation on blockchain and smart contracts in insurance.

    May 06, 2022 WebPage Regulatory News
    RESULTS 1 - 10 OF 8179