The systemic risk of leveraged and covenant-lite loan syndications

By modelling the whole U.S. syndicated loan market as a financial network from 2000 to 2022, we find that highly connected institutions hold significant shares of leveraged and covenant-lite loans. Our analysis indicates that the size of leveraged and covenant- lite syndicated loan portfolios increases financial institutions' systemic risk, particularly during recession periods. Although banks commonly sell syndicated loans shortly after origination, our results suggest that they remain vulnerable to pipeline risk. Our study has significant implications for policymakers and regulators, as it can aid in identifying banks exposed to systemic risk associated with leveraged and covenant-lite loans and in ranking systemically important financial institutions accordingly. • Leveraged and covenant-lite loans pose systemic risk in US banks. • We develop a new measure of syndication risk, SN_RISK. • Network analysis reveals risk concentration in highly connected institutions. • Findings have important implications for policymakers and regulators.