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Banks exposed to possible leveraged-loan market tumult, BIS says

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Banks may be exposed to a shakeout in the $1.3 trillion leveraged-loan market even though they mostly own the safest portions of debt, according to the Bank for International Settlements.

Lenders could be vulnerable if they’ve extended credit lines to leveraged borrowers, rely on fees from collateralized loan obligation managers or struggled to rebuild capital reserves since the last crisis, analysts at Basel-based BIS said in a report published on Sunday.

CLOs, which slice up pools of loans into securities of varying risks, are attracting scrutiny from regulators because they’ve soared in popularity since their senior tranches survived the last crisis unscathed. Japanese lenders account for about 60% of the direct bank ownership of CLO tranches, BIS said, while lenders including Deutsche Bank AG are also buying the safest tranches to boost returns on their spare cash.

“The concentration of exposures in a small number of banks may result in pockets of vulnerability,” BIS analyst wrote. “In general, banks are likely to face lower losses from direct securitization exposures and should be in a better position to manage them than in the 2006–07 subprime crisis.”

Bloomberg News