Banks exposed to possible loan market tumult, BIS says

Banks may be exposed to a shakeout in the $1.3 trillion leveraged-loan market even though they mostly own the safest portions of debt, according to the Bank for International Settlements.

The exterior of the Bank for International Settlements (BIS) is seen in Basel, Switzerland.
The exterior of the Bank for International Settlements can be seen in Basel, Monday, January 9, 2006. European Central Bank President Jean- Claude Trichet said the global economy withstood the increase in oil prices last year and may accelerate in 2006, suggesting interest rates in major economies may rise. Photographer: Christophe Bosset/Bloomberg News

Lenders could be vulnerable if they've extended credit lines to leveraged borrowers, rely on fees from collateralized loan obligation managers or struggled to rebuild capital reserves since the last crisis, analysts at Basel-based BIS said in a report published on Sunday.

CLOs, which slice up pools of loans into securities of varying risks, are attracting scrutiny from regulators because they've soared in popularity since their senior tranches survived the last crisis unscathed.

Japanese lenders account for about 30% of the direct bank ownership of CLO tranches, BIS said, while lenders including Deutsche Bank are also buying the safest tranches to boost returns on their spare cash.

"The concentration of exposures in a small number of banks may result in pockets of vulnerability," BIS analysts wrote. "In general, banks are likely to face lower losses from direct securitization exposures and should be in a better position to manage them than in the 2006-07 subprime crisis."

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