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Why loan syndication is a risky business

Syndicated loan issuance has grown dramatically over the last 25 years. Over the period, the syndicated loan business model has evolved, affecting the nature of the associated risks that arranging banks are exposed to. This column introduces the concept of ‘pipeline’ risk –the risk associated with marketing the loans during the syndication process. Pipeline risk forces arranging banks to hold much larger shares of very risky syndicated term loans, which results in reduced lending by the arran­­ging bank not only in the syndicated term loan market, but in others as well.
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