The European Central Bank will crack down on the dangerous risks of bank leveraged loans

The head of supervision of the European Central Bank warned that banks are too complacent about the excessive risks accumulated in leveraged loans and equity derivatives markets, and therefore may expect higher capital requirements.

Andrea Enria said on Friday that he was concerned about the bank’s “market complacency and excessive risk-taking”, adding that “there are warning signs of increased leverage, financial complexity and opacity, which could lead to risk factors. Dangerous combination”.

ECB officials said that the speech showed that regulators have lost patience with Deutsche Bank and other larger euro zone banks. Its calling So that they can control higher-risk loans.

“Where we see shortcomings, we will take supervisory action,” Enlia said in an online speech to graduates of Finance and Economics from the University of Naples.

“In key areas such as leveraged financing, banks’ previous regulatory guidelines have not been fully implemented. We plan to deploy a full range of available regulatory tools, including minimum capital requirements commensurate with the specific risk profile of individual banks. This should become necessary,” he said. .

The head of supervision of the European Central Bank said earlier this week that it would Raise the hat Dividends and stock repurchases from banks later this year. He said on Friday that the bank “remains resilient” and “the uncertainty has diminished, and from all indicators, the economic system is on the road to recovery.” The European Central Bank will announce the results of the banking industry stress test on July 30.

However, despite the more optimistic outlook, Enria said: “In our view, the specific signs of risk accumulation have become obvious in the field of risky assets such as leveraged debt and stock-related derivatives, and supervision is needed.”

He said the huge amount of support provided by governments and central banks has protected the financial system from the effects of the coronavirus pandemic.

But he said that this may have contributed to complacency, and warned that when this support is withdrawn, there is a risk that “asset prices will suddenly pull back”, especially “if investors expect inflationary pressures to persist and adjust their stance on monetary policy.” Expectations”.

“A new round of tensions surrounding risky assets will once again expose the entire ecosystem of non-bank entities and funds to liquidity risks due to investor redemptions and loss of credit and valuation,” he added.

United States Federal Reserve May warning Some asset valuations “have improved relative to historical standards,” and “if risk appetite declines, there may be a sharp decline.”

Although the European Central Bank has called on banks to control leveraged loans since 2017-the practice of financing private equity groups and other corporate asset buyers-Enria stated that the most active banks in the field “underwriting standards have deteriorated further.”

He said that in the fourth quarter of 2020, more than half of these banks’ leveraged loans had debt equivalent to more than six times the earnings before interest, taxes, depreciation and amortization, and they were light contracts — depriving investors of the usual protections. -Or there is no contract at all.

Last year, Deutsche Bank Refused The European Central Bank requested the suspension of key parts of its leveraged financing business because of concerns that it did not properly monitor risks in this area because it is one of the largest banks in Europe. Deutsche Bank declined to comment on Friday.

Enria also expressed concern about how banks “worriedly” failed to control the risk of the Eurozone’s 15 trillion euro equity derivatives market, which allows investors to place leveraged bets on the stock market.

He said that Bill Hwang’s Archegos family office closed in March, which highlights the risks in this market, which makes some banks’ “unsatisfactory profit margins” care lost heavilyCredit Suisse lost US$5 billion in credit to Archegos and Nomura Securities lost US$3 billion.

Speaking of “the broader issues of the opacity of the shadow banking sector and the degree of interconnectedness of financial markets,” Enlia said, “it is necessary to revise the regulatory dialogue at the global level because new solutions may be needed.”

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