Low Rates May Drive Banks to Riskier Business, ECB’s Enria Warns

(Bloomberg) --

The European Central Bank’s monetary policy may be pushing banks into riskier areas of business as lenders pursue higher yields to counter low interest rates, according to its head of supervision, Andrea Enria.

The side effects are already showing, with investments in areas such as under-pressure real estate markets and in demand for collateralized loan obligations, Enria said at a panel discussion at the Bank of Spain in Madrid on Wednesday.

“We have issued recommendations to banks to strengthen their asset management and limit their exposure to highly-leveraged transactions,” he said.

The ECB’s decision to extend its negative interest rate policy has drawn criticism from some banks as they see shrinking profit margins and struggle with the challenge of passing on the costs to customers. Enria acknowledged that the ECB’s policies are exerting pressure on banks’ profitability, but argued that the strategy also has some benefits.

“There is a positive effect by promoting a better macroeconomic environment, which means that borrowers are more likely to pay back their loans,” he said. “Also, there has been a better window for banks to dispose of their non-performing loans and clean up their balance sheets.

“As supervisors, our point to the banks is to try to make the best out of this situation and try to focus on efficiency, on refocusing the business model and to do the things that they can do better.”

To contact the reporter on this story: Charlie Devereux in Madrid at cdevereux3@bloomberg.net

To contact the editors responsible for this story: Dale Crofts at dcrofts@bloomberg.net, Ross Larsen, Charles Penty

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