The Growth of Leveraged Lending and Its Effects on the Stability of Our Economy
Open Access
Author:
Narayana, Sanket
Area of Honors:
Economics
Degree:
Bachelor of Science
Document Type:
Thesis
Thesis Supervisors:
Qi Li, Thesis Supervisor Dr. Russell Paul Chuderewicz, Thesis Honors Advisor
Keywords:
Federal Reserve Credit Fixed Income Monetary Policy Fiscal Policy Moral Hazard Treasury Bonds Loans
Abstract:
This paper seeks to analyze the growth of the leveraged lending market and the effects it has on the economy. This paper examines different ways companies can raise capital with a particular emphasis on the leveraged loan and high-yield bond markets. The Board of Governors of the Federal Reserve System, Federal Deposit Insurance Corporation, and Office of the Comptroller of the Currency raised scrutiny of these markets and issued the “Interagency Guidance on Leveraged Lending” in 2013. However, the Trump administration decided to roll back on these restrictions in 2016 and stated the guidelines did not have the same power as a law. This paper analyzes the impact of the implementation and repeal of the leveraged lending guidelines on several financial ratios and performance metrics of publicly traded US companies. After conducting multiple regression analyses, the “Interagency Guidance on Leveraged Lending” had a significant impact on several variables. However, the various federal agencies and financial institutions have to balance the growth goals of corporations and the stability of the economy from overleveraging that can be explored with further research and policy options.
