The European Central Bank said a review of lenders’ leveraged finance exposures showed them to be riskier than other corporate loans, underlining its scrutiny of a lucrative corner of banking.
“Highly indebted borrowers are more sensitive to adverse economic developments,” the ECB said Friday in a report on a broad stress test of European banks.
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For 24 banks with “material exposures” to leveraged finance, the portfolio caused an average depletion in their key capital ratio of about 0.25 percentage points in the loan book and 0.03 percentage points in their underwriting pipeline, the ECB said.
Bloomberg reported last week that the ECB is escalating its crackdown on leveraged finance by preparing to impose higher capital requirements on more lenders after earlier doing so to Deutsche Bank AG and BNP Paribas SA. The findings from the stress test are likely to be factored into those deliberations.
Demand for Improvements
The ECB said lenders need to improve their valuation of their leveraged finance pipeline, modeling and data aggregation capabilities.
Read More: ECB Eyes Capital Charges for More Banks on Leveraged Finance
European lenders have in recent years piled into extending credit to highly indebted borrowers, which often were the subject of private equity takeovers, as they sought to compete with US firms in an area that can be highly profitable and help them win other business.
This has prompted ECB concerns as far back as 2017.
