Most of the large global investment banks are better prepared to weather severe stress in their leveraged lending activities than they were in the years leading up to the financial crisis, reports Moody’s Investors Service.
In a new report, the rating agency said it found the world’s major investment banks are, as a group, “resilient to a hypothetical very severe stress of their leveraged lending exposures.”
Moody’s noted that most banks have imposed tougher limits on leveraged lending, which indicates stricter risk management in this area.
Additionally, the loans themselves are smaller, so the banks are less exposed to any single transaction.
“Compared with the 2006-08 period, most global investment banks have significantly lower direct leveraged lending exposures,” the report said.
In a hypothetical severe stress scenario, it said most banks would see losses that amount to “less than half of firm-wide pretax earnings.”
Moody’s said that, while the impact of its stress test varies, it’s generally banks that are more reliant on capital markets revenue, or banks that are less profitable, that would feel the biggest effects.
“Still, losses for most would be limited to one or two quarters of firm-wide earnings in our stress scenarios,” the report said.