The ECB’s top supervisor Andrea Enria said that 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.
Despite the pandemic, banks had become complacent and risk-hungry after years of low rates and rising stock markets, said Enria. Pointing to a boom in the issuance of collateralized loans obligations, equity swaps and loans to already indebted clients Enria had stated this.
During an academic lecture Enria stated that concrete signs of risk build-up have in their view become apparent in the risky asset segments of leveraged debt and equity-related derivatives. This bonanza may come to an end when pandemic-fighting public support measures are withdrawn, warned Enria. And also, if investors start expecting inflation to accelerate and demand higher interest rates. Banks can be hit by their direct holdings and their exposure to shadow banks, that is investment funds that extend credit.
He also added that in key areas such as leveraged finance they plan to deploy the full range of supervisory tools available to them. And this includes minimum capital requirements commensurate with the specific risk profile of individual banks. The ECB has told Deutsche Bank AG that it will probably need to hold more equity to account for the risk in leveraged loans.