Press Release

Increased Leveraged Loans Add to US Shadow Banking Risks in COVID-19 Stressed Environment

Banking Organizations, Non-Bank Financial Institutions
April 29, 2020

DBRS, Inc. (DBRS Morningstar) published a commentary analyzing the developments in U.S. shadow banking given the abrupt economic downturn driven by the Coronavirus Disease (COVID-19). The risks posed by shadow banking have evolved with the shift in the mix of U.S. shadow banking assets.

Key highlights include:

-- U.S. shadow banking assets already totaled a sizeable $15 trillion as of 2018, about two thirds the size of the assets in U.S. banks.
-- Overall U.S. shadow banking assets have not grown since the Financial Crisis, but the mix has shifted significantly. Collective investment vehicles (CIVs) now account for 67% of shadow banking assets as of 2018, up from just 29% in 2006.
-- Risks from the growth in leveraged lending remain significant due to the increased size of the market, as well as the growing proportion of loans, with less restrictions on collateral, payment terms or level of income.
-- While banks have extended a majority of leveraged loan commitments, the shadow banking financial intermediaries (FIs) are primarily holding the non-investment grade loans on their balance sheets.

“DBRS Morningstar sees increasing risks from U.S. shadow banking due to the growth of CIVs, as well as the expansion of leveraged loans. With the sustained growth of CIVs, fund outflows and maturity mismatches now pose a greater risk than going into the prior Financial Crisis. Shadow banking FIs hold a majority of these leveraged loans that have a deteriorating risk profile, with weaker covenants and loan structures,” said Man Na Cheung, Assistant Vice President.

Notes:
The commentary is available at www.dbrsmorningstar.com.

For more information, visit www.dbrsmorningstar.com or contact us at info@dbrsmorningstar.com.

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