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

Abstract

Purpose

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/approach

This 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.

Findings

This 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/value

This 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.

Citation

Schenck, N. and Shi, L. (2022), "Impact of Leveraged Lending Guidance: evidence from nonbank participation in syndicated loans", Journal of Financial Regulation and Compliance, Vol. 30 No. 5, pp. 567-595. https://doi.org/10.1108/JFRC-11-2021-0099