Surge in leveraged lending not a risk to Canadian financial system: report

The volume of leveraged lending has grown substantially since the financial crisis, but shouldn’t pose a major risk to the Canadian financial system, suggests a new report from DBRS Morningstar.

Globally, the total value of leveraged loan origination has almost tripled since 2008, according to the report. In Canada, volumes are up almost five times their level in 2008.

“The origination of these loans is dominated by the large banks and is predominantly focused on a few sectors,” the report stated. “However, the banks do not retain all the loans that they originate, so they form a small, albeit riskier, portion of these banks’ overall commercial loan portfolios.”

The report noted that leveraged loans remain relatively small in Canada, compared to the overall size of the credit market. And, at this level, leveraged lending doesn’t represent a major risk to the Canadian financial sector, DBRS Morningstar concluded.

“Given the size of the market in Canada, in DBRS Morningstar’s view, leveraged loans do not pose a major risk, but they could exacerbate the impact of a downturn,” the report said.

For instance, it said that “a significant market dislocation” that continues for an extended period “could cause implications for the banks.”

James Langton

James is a senior reporter for Advisor.ca and its sister publication, Investment Executive. He has been reporting on regulation, securities law, industry news and more since 1994.