Booming Securitized Loan Market Has Echoes of Financial Crisis, BIS Warns

The global outstanding CLO market is now estimated to stand at about $750 billion, while the CDO market in 2007 before the crisis came to $640 billion.

By Saikat Chatterjee and cross-posted from Reuters

Lending standards in the rapidly growing loan market are deteriorating and complex financial products that mask risks to banks have parallels with the run-up to the 2008 financial crisis, the Bank for International Settlements warned on Sunday.

The number of collateralised loan obligations (CLOs), a form of securitisation which pools bank loans to companies, has ballooned in recent years as investors hunt for higher returns by buying into loans to lower-rated and riskier companies.

Like the collateralised debt obligations (CDOs) that bundled U.S. sub-prime mortgages into complex products and were blamed for triggering the global financial crisis, CLOs also have complex structures that can mask underlying risks.

The BIS said there were important differences between CLOs and CDOs that made the former less risky, but it warned that the scramble by investors for higher yields was leading to worsening standards that could trigger bigger losses in the future.

“Weak underwriting standards can reduce the likelihood of defaults in the short run but increase the potential credit losses when a default eventually occurs,” Sirio Aramonte and Fernando Avalos, researchers at the umbrella group for central banks said in a quarterly report.

The global outstanding CLO market is now estimated to stand at about $750 billion, while the CDO market in 2007 before the crisis came to $640 billion, the BIS said

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