ECB Pushes Banks to Reduce Risk in Booming Leveraged-Loan Market
A star of the euro sign sculpture hangs illuminated near the former European Central Bank (ECB) headquarters at night in Frankfurt, Germany. (Photographer: Krisztian Bocsi/Bloomberg)

ECB Pushes Banks to Reduce Risk in Booming Leveraged-Loan Market

The European Central Bank is pushing banks to improve how they control risks when they extend credit to highly-indebted companies, a growing business that promises both higher returns and a greater potential losses than traditional lending.

The ECB is considering measures including extra capital requirements for banks that don’t adequately address the risks they face in making leveraged loans, according to a spokeswoman.

Leveraged finance -- which frequently involves lending to companies as part of a takeover by a private-equity firm -- is booming as banks seek higher margins in a period of low interest rates. It has been a key area of growth for Deutsche Bank AG, which says it has gained market share after Chief Executive Officer Christian Sewing vowed to focus on the bank’s strengths.

Read more on the highest inflows to leveraged finance since 2017

Last year, Deutsche Bank failed to heed an ECB recommendation to suspend parts of its leveraged finance operations over shortcomings in how they are managed, a person familiar with the matter said at the time. While the lender took remedial action in time, it didn’t follow a request to halt high-risk transactions until the issue was resolved, the person said, asking not to be identified discussing private information.

The Financial Times reported the comments earlier.

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