Title: Leveraged loans, systemic risk and network interconnectedness
Authors: Monica Billio - University of Venice (Italy)
Alfonso Dufour - ICMA Centre (Italy)
Ana Sina - University of Reading (United Kingdom) [presenting]
Simone Varotto - University of Reading (United Kingdom)
Abstract: Especially among those who lived the global financial crisis of 2007-2008, it is likely that few regulators will instinctively be careless about the above pre-crisis level achieved by the global syndicated leveraged loans. We introduce global syndicated leveraged loans to study the relationship between systemic risk, syndicated leveraged loans, and network interconnectedness. We analyse the U.S. and European syndicated loans that together account for almost 80\% of the global syndicated database during the period from 1988 to 2019. By distinguishing between leveraged and other syndicated loans, we develop a novel measure of systemic risk as the ratio between leveraged and total loans that each lead arranger holds. We make the following contributions. First, we show that leveraged loans have already exceeded the pre-financial crisis level, which may pose financial stability concerns. Second, we relate our novel measure with the systemic risk of each financial institution and find a significant correlation, which may suggest that this new measure is employable as an early-warning. Finally, since the syndicated loan market can be represented as a network where the linkages and nodes are based on real collaborations among lead arrangers, we show that the financial institutions that have a larger proportion of leveraged loans in their portfolio are the most central in the network and this may cause possible implications for the future financial stability.