The European Central Bank plans to come down on banks that are taking too much risk via financial instruments such as leveraged loans and equity-related derivatives, the ECB‘s top supervisor Andrea Enria said on Friday.
Enria said there was evidence that despite the pandemic, banks had become complacent and risk-hungry after years of low rates and rising stock markets, pointing to a boom in the issuance of collateralised loans obligations, equity swaps and loans to already indebted clients.
“Concrete signs of risk build-up have in our view become apparent in the risky asset segments of leveraged debt and equity-related derivatives, which warrant intensified supervision,” Enria said during an academic lecture via weblink.
He warned this bonanza may come to an end when pandemic-fighting public support measures are withdrawn or if investors start expecting inflation to accelerate and demand higher interest rates.
This would hit banks both via their direct holdings and their exposure to shadow banks, that is investment funds that extend credit, Enria said.
“In key areas such as leveraged finance … we plan to deploy the full range of supervisory tools available to us, including minimum capital requirements commensurate with the specific risk profile of individual banks, should this become necessary,” he added.
The ECB has told Deutsche Bank AG it will probably need to hold more equity to account for the risk in leveraged loans, Bloomberg News reported last week, citing people familiar with the matter.
Source: Reuters