The European Central Bank (ECB) is threatening to impose additional capital requirements on banks that fail to control risks related to the leveraged loan market. The ECB said via a statement, “Where banks incur risks in leveraged lending that are not adequately addressed by appropriate risk management practices, ECB banking supervision is considering supervisory actions and measures, including qualitative or quantitative requirements as well as capital add-ons.” Leveraged loans are high yield debt used to fund private equity takeovers of companies, with banks only keeping a small portion of the risk on their books and selling almost all of the loans to other investors. The FT added that Deutsche Bank was asked to suspend its leveraged finance business due to a lack of appropriate risk controls last summer, which the bank refused to do stating that the request was “impractical”. Deutsche Bank generated revenues of €1.2bn ($1.45bn) for the first nine months of last year, up 43% YoY. Other lenders with a sizeable leveraged finance business include BNP Paribas. Deutsche Bank’s 7.5% perp traded stable at 105.5 while BNP’s 6.625% perp traded at 109 on the secondary markets.
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