Leveraged Loans and Systemic Risk (Last of a Series)

If nothing else, the history of leveraged lending since the credit crisis shows both regulators and regulated entities have worked to shift loans off bank balance sheets.

The object of Leveraged Lending Guidance, in turn, was not to eliminate credit risk, but limit the most aggressive bank lending practices – for example, leverage over six times ebitda. That would, in turn, help minimize risk to depositors.

The Great Recession only accelerated what has been twenty-plus years of disintermediation from banks to “shadow” banks. In 1997, as our Chart of the Week shows, banks held two-thirds of all institutional term loans. Today it’s less than 9%.

Even as Dodd-Frank was being ironed out, came worries that future loan problems would be far less transparent to regulators. If non-bank investors took on more risk, subsequent credit problems would be outside agencies’ purview.