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Impact of Leveraged Lending Guidance: evidence from nonbank participation in syndicated loans

Impact of Leveraged Lending Guidance: evidence from nonbank participation in syndicated loans The purpose of this study is to examine the impact of supervisory Leveraged Lending Guidance (LLG) (2013–2014) on risk and structure of syndicated loans arranged by the largest US banks with participation of nonbank lenders.Design/methodology/approachThis study uses supervisory shared national credit loan-level data from 2010 to 2015 and DealScan loan origination data and use linear regressions with clustered standard errors.FindingsThis study finds that the impact of the LLG was mixed. Incidence and risk of leveraged lending declined following the Guidance, as reflected in lower nonbank syndicate participation. However, the covenant protections weakened and loan spreads at origination declined. This study also provides evidence that some risky lending originations shifted to nonbank entities outside of the banking regulatory environment.Originality/valueThis study contributes and expands literature on the impact of regulatory guidance on loan risk, terms and structure, focusing on nonbank participation in syndicated commercial loans. http://www.deepdyve.com/assets/images/DeepDyve-Logo-lg.png Journal of Financial Regulation and Compliance Emerald Publishing

Impact of Leveraged Lending Guidance: evidence from nonbank participation in syndicated loans

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Publisher
Emerald Publishing
Copyright
© Emerald Publishing Limited
ISSN
1358-1988
eISSN
1358-1988
DOI
10.1108/jfrc-11-2021-0099
Publisher site
See Article on Publisher Site

Abstract

The purpose of this study is to examine the impact of supervisory Leveraged Lending Guidance (LLG) (2013–2014) on risk and structure of syndicated loans arranged by the largest US banks with participation of nonbank lenders.Design/methodology/approachThis study uses supervisory shared national credit loan-level data from 2010 to 2015 and DealScan loan origination data and use linear regressions with clustered standard errors.FindingsThis study finds that the impact of the LLG was mixed. Incidence and risk of leveraged lending declined following the Guidance, as reflected in lower nonbank syndicate participation. However, the covenant protections weakened and loan spreads at origination declined. This study also provides evidence that some risky lending originations shifted to nonbank entities outside of the banking regulatory environment.Originality/valueThis study contributes and expands literature on the impact of regulatory guidance on loan risk, terms and structure, focusing on nonbank participation in syndicated commercial loans.

Journal

Journal of Financial Regulation and ComplianceEmerald Publishing

Published: Sep 26, 2022

Keywords: Banking regulation; Syndicated loans; Leveraged lending; Nonbanks

References