In Brief: Competition Making Syndications Riskier

International syndicated lending reached a record $194.5 billion in the second quarter, but competition and pressure on profits are pushing banks into "more complex or riskier areas such as project financing, merger and acquisition financing, and lending to borrowers from transition and emerging market countries," Bank for International Settlements noted in its quarterly review of financial markets.

The bank noted that although commercial banks in North America and the United Kingdom continued to post strong profits, competition for loans has increased as investment banks, mutual funds, and insurance companies move into the syndicated lending market.

"Investment banks have been expanding their loan syndication departments in the hope that merger-related financing will bring them lucrative advisory business," the report noted.

Despite high margins on some merger-related loans, average spreads continue to decline, the bank observed, adding that "there was also evidence of growing resistance to a further erosion of margins, with some banks even refusing to participate in low-return syndications."

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