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Research-based policy analysis and commentary from leading economists

From credit risk to pipeline risk: Why loan syndication is a business that is risky

Max Bruche, Frederic Malherbe, Ralf R Meisenzahl 11 2017 september

Syndicated loan issuance has exploded considerably during the last 25 years. The syndicated loan business model has evolved, affecting the nature of the associated risks that arranging banks are exposed to over the period. The concept is introduced by this column of ‘pipeline’ risk –the risk linked with advertising the loans through the syndication procedure. Pipeline danger forces arranging banking institutions to keep much bigger shares of really high-risk syndicated term loans, which results in reduced lending by the bank that is arran­­ging just in the syndicated term loan market, however in other people aswell.

Syndicated loan issuance – by which banking institutions partner along with other finance institutions to originate large loans – has grown considerably over the past 25 years. In 2016, non-financial corporations borrowed $3.4 trillion all over the world through the loan that is syndicated, causeing the source of funding somewhat bigger than the issuance of bonds and equity (see Figure 1). A lot of the expansion in syndicated lending happens to be driven by fundamental alterations in the term loan market that is syndicated. During the early 1990s, a bank that arranged a loan that is syndicated along with other banking institutions to make the definition of loan syndicate, as well as the organizing banks kept an amazing share associated with the loan (20–30%) on its books.