Leveraged Lending

Liquidity Risk

Liquidity risk is the current and prospective risk to earnings or capital arising from a bank‘s inability to meet its obligations when they come due without incurring unacceptable losses. Liquidity risk includes the inability to manage unplanned decreases or changes in funding sources. Liquidity risk also arises from a bank‘s failure to recognize or address changes in market conditions that affect the ability to liquidate assets quickly and with minimal loss in value.

Changes in investor appetite and market volatility can adversely affect the liquidity of a bank’s leveraged lending portfolio. As noted above, such changes can result in a bank’s need to fund (hold) a larger amount of the loan than originally planned or distribute at a reduced price. Hold limits for all members in a syndicate group, regardless of role, can change from that originally planned. In addition, the ability to liquidate portions of the portfolio to meet other funding requirements or take advantage of other opportunities can be affected significantly by the market’s demand for this asset class.

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