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On the Impact of Leveraged Buyouts on Bank Systemic Risk

SAFE Working Paper No. 101

35 Pages Posted: 5 May 2015  

Marcel Grupp

Goethe University Frankfurt

Date Written: April 2015

Abstract

Although banks are at the center of systemic risk, there are other institutions that contribute to it. With the publication of the leveraged lending guideline in March 2013, the U.S. regulators show that they are especially worried about the private equity firms with their high-risk deals. Given these risks and the interconnectedness of the banks through the LBO loan syndicates, I shed light on the impact of a bank’s LBO loan exposure on its systemic risk. By using 3,538 observations between 2000 and 2013 from 165 global banks, I show that banks with higher LBO exposure also have a higher level of systemic risk. Other loan purposes do not show this positive relationship. The main drivers influencing this relationship positively are the bank’s interconnectedness to other LBO financing banks and its size. Lending experience with a specific PE sponsor, experience with leading LBO syndicates or a bank’s credit rating, however, lead to a lower impact of the LBO loan exposure on systemic risk.

Keywords: Leveraged buyouts, syndicated loans, systemic risk

JEL Classification: G21, G23, G28

Suggested Citation

Grupp, Marcel, On the Impact of Leveraged Buyouts on Bank Systemic Risk (April 2015). SAFE Working Paper No. 101. Available at SSRN: https://ssrn.com/abstract=2602220 or http://dx.doi.org/10.2139/ssrn.2602220

Marcel Grupp (Contact Author)

Goethe University Frankfurt ( email )

Grüneburgplatz 1
Frankfurt am Main, 60323
Germany

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