Question

What are the potential systemic risks of leveraged loans and why are the Bank of England and the Federal Reserve concerned? What kind of spillovers could they cause/Why will you “take a hit if it implodes? (max 300 words)

Answer 1

The Bank of England and Federal Reserve are concerned about systemic risks of leveraged loans because these are made to those companies which are already highly indebted and bloating of that debt amount can become problem if these companies start defaulting on loans in case the economy does not turn around and they are unable to return those loans to the lenders. This also indicates a decline in lending standards. Secondly unsecured loans have been growing at a faster rate which grew by more than 11% in 2016 before falling to 7.5% last year. Growth of unsecured loans at such rate can become a larger problem for the lending institutions if they are defaulted.

Second part of these loans are those which are provided to students who study on student loans. New job creation is a big challenge in today's time and considering that when a student steps out of the graduating college without a job in hand becomes a challenge for him/her to repay his/her loan. Hence these loans can become a challenge in the years to come if economy does not start showing signs of improvement.