A recent study from the University of Bath has raised alarms about the escalating systemic risks in the US leveraged loan market, warning that these could precipitate another financial crisis. The study, published on June 25, 2025, identifies several concerning trends, including the underpricing of loans, the growing influence of less-regulated non-bank lenders, and the weakening of loan standards.

Leveraged loans, which are extended to companies with high levels of debt or weaker credit histories, are becoming increasingly underpriced, especially by non-bank lenders. These lenders, operating outside the stringent regulatory frameworks that govern traditional banks, are contributing to a market environment ripe for instability. The study notes a significant decline in the pricing of leverage risk since 2014, with the risk premium dropping most for the riskiest borrowers, highlighting structural vulnerabilities in the leveraged lending landscape.

The role of Collateralized Loan Obligations (CLOs) in this scenario cannot be overstated. CLOs, which repackage leveraged loans into securities sold to investors, now account for approximately 70% of the US leveraged loan market. While they transfer risk away from original lenders, they also create complex structures that obscure the true nature of the underlying assets, leaving investors in the dark.

Further compounding the risk is the prevalence of ‘covenant-lite’ loans, which offer fewer protections for lenders and greater flexibility for borrowers, even in times of financial distress. This erosion of loan standards makes it more difficult for lenders to intervene before losses escalate.

Regulators are increasingly concerned about the rapid growth and interconnectedness of the private credit market, which is largely composed of non-bank lenders and their leveraged loan activities. The sheer scale of this market means that any significant disruption could have widespread implications for financial stability.

While previous assessments, such as a 2020 GAO report, downplayed the threat posed by leveraged lending during the COVID-19 pandemic, the current environment—marked by underpriced risk, the rise of shadow banking, and lax lending standards—presents a new and urgent challenge. The study underscores the need for heightened vigilance and possibly regulatory intervention to avert a potential crisis.

This news story relied on content distributed by None. Blockchain Registration, Verification & Enhancement provided by NewsRamp. The source URL for this press release is Study Warns of Growing Systemic Risks in US Leveraged Loan Market.