Non-bank lenders represent an important source of funding for non-financial corporates (NFCs) in general (Aramonte and Avalos (2021)) and through syndicated loans in particular (Elliott et al (2019)). The reach of non-banks extends beyond financial market conditions. With the March 2020 market turmoil serving as a case study, substantial efforts have been made to understand how such instability can unfold and what policy measures can mitigate it (Carstens (2021)). ![]() While they can contribute to a more diversified and efficient financial system, non-banks can also be a source of instability due to, for instance, liquidity mismatches (Aramonte et al (2021)). The increasing footprint of non-bank financial intermediaries has put them front and centre of policymakers' agendas. During domestic financial crises, they reduce this share further, exacerbating the global transmission of shocks. Non-banks generally grant a smaller share of their new loans to foreign borrowers than banks do. Syndicated loans arranged by non-banks carry a significantly higher spread relative to those by banks, consistent with the pattern that firms borrowing from non-banks are more leveraged and less profitable, ie riskier. Their loan origination, however, is more concentrated by location and sector than that of banks and it is also more volatile. Leveraged loans are also on the rise outside the U.S., though the market is smaller and more of the debt is retained by banks.Non-bank lenders are an important source of syndicated credit to non-financial corporates in most regions and industries. Banks grew bolder in piling debt onto firms, often under easier terms, in a bonanza that led to expressions of unease from the Bank of England and the International Monetary Fund as well as the Fed. regulators had set on leveraged loans in 2013. Adding fuel to the fire was a loosening of the limits that U.S. Leveraged loans also still offered more yield than the pervasively low rates on higher-rated investments. Federal Reserve’s planned campaign of rate hikes, which made the floating-rate loans more attractive to some investors as a hedge against possible losses on fixed-rate borrowing. The surge in 2017 had been fueled in large part by the U.S. But, in a sign of how volatile leveraged loans can be, the market quickly began to rebound in January as buyers were lured back in by newly cheap valuations. Sales for December hit their lowest since 2011, prices plunged and investors pulled money from funds that invest in loans at a record pace. But loan sales fell to $814 billion in 2018, as global turbulence knocked the wind out of the assets starting in late October. leveraged loans had almost doubled between 20, when a record $1.1 trillion were issued. If there’s a happy ending, it might be the work of regulators who tried to crack down as debt piled up, or it might be because the money simply moved elsewhere as interest rates rose on safer alternatives. ![]() ![]() But not all bubbles end with a bust - sometimes the air just leaks out of them. companies and private equity firms to do things like fund buyouts, pay shareholder dividends and refinance borrowings. ![]() Their growth has been explosive, providing more than $1.3 trillion in loans used by U.S. With so-called leveraged loans - high-interest, floating-rate borrowing by companies with shakier credit - the ending still isn’t clear. We've seen this movie before, and the later scenes usually aren’t pretty. Small investors clamor for a piece of the action. A dark corner of the financial market springs to life.
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