The European Central Bank (ECB) wants to put a damper on the market for leveraged loans even before it heats up.
Banking supervisors will look at individual lenders' exposure to the loans, which are often used to finance corporate buyouts, and other risky debt to preempt the threat that risks could quickly mount in the market, Sabine Lautenschlaeger, vice chair of the ECB's supervisory arm, said in New York on Tuesday. The ECB also may publish regulatory guidelines to set expectations for the industry, she said.
“I do not see it as the biggest risk, but I see a certain danger that market players see things a tad brighter than they are,” Lautenschlaeger said. “So it is up to me as a supervisor, and up to you as risk managers, to counterbalance this view,” she said in a speech to the Global Association of Risk Professionals.
Lautenschlaeger said regulators are acting after the market, which declined following the 2008 financial crisis, began to grow in 2011. Banks have increased their exposures to leveraged-finance products, which have generated more than 5 billion euros (US$5.4 billion) in net revenue for European banks in 2014, she said.
European banks still represent a small part—about 15 percent—of the global market for leveraged loans, she said. There are about 400 billion euros in leveraged loans in Europe, according to data compiled by Bloomberg.
“Leveraged finance is certainly not a major supervisory concern at the moment, but the recent development of the relevant market exemplifies the need for good risk governance, a well defined and closely monitored framework for risk appetite, and highly assertive risk management,” Lautenschlaeger said.
–With assistance from Rebecca Christie, Jeanna Smialek, Alessandro Speciale and John Glover.
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