Study Warns of Growing Systemic Risks in US Leveraged Loan Market
A University of Bath study highlights increasing systemic risks in the US leveraged loan market, driven by underpriced loans, the rise of non-bank lenders, and deteriorating loan standards, potentially leading to another financial crisis.
A recent study from the University of Bath has raised alarms about the growing systemic risks in the US leveraged loan market, warning of potential financial instability. The study, published on June 25, 2025, identifies several concerning trends, including the underpricing of leveraged loans, the significant role of less-regulated non-bank lenders, and the deterioration of loan standards. These factors collectively increase the vulnerability of the financial system to a crisis.
Leveraged loans, which are extended to companies with high levels of debt or weaker credit histories, are becoming increasingly underpriced, especially by non-bank lenders. This trend is concerning because these lenders operate with less regulatory oversight than traditional banks, raising questions about risk management and transparency. The study also notes a surge in default rates, which reached a four-year high of 7.2% in December 2024, according to the Financial Times. Many borrowers are engaging in 'distressed exchanges' to avoid bankruptcy, further highlighting the market's fragility.
Key factors contributing to the heightened risks include the weakening pricing of leverage risk, the rise of non-bank lenders, the surge in Collateralized Loan Obligation (CLO) issuance, and the widespread adoption of 'covenant-lite' loans. These developments have led regulators to express concerns about the potential for systemic threats to financial stability. The study underscores the need for a comprehensive regulatory framework to address these risks and prevent a repeat of past financial crises.