Friday 9 December 2016

ECB looking to limit leveraged loans

Published 03/03/2016 | 02:30

Bank of Ireland headquarters in Dublin
Bank of Ireland headquarters in Dublin

Bank of Ireland faces a possible hit to one of its most profitable business units from tougher rules for lenders in the European leveraged loans market mooted in Frankfurt.

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The bank's €3.9bn acquisition finance unit is a substantial part of Bank of Ireland's international corporate lending arm which threw off underlying profits of €637m last year.

New rules proposed by the European Central Bank (ECB) could restrict the scale of lending by European banks, similar to what happened in the mortgage market here.

Banking supervisors will look at individual lenders' exposure to the loans, which are often used to finance corporate buyouts, to pre-empt the threat that risks could quickly mount in the market, according to Sabine Lautenschlaeger, vice chair of the ECB's supervisory arm.

Bank of Ireland said its mid-market leveraged acquisition finance business has been a consistently profitable and highly successful business for the group for over 20 years.

The business is already regulated here and in the US, a spokesman said. "Acquisition Finance is no different to any of our other businesses in this respect and will continue to operate in compliance with regulatory requirements."

While tougher regulation could cut back lending, tighter rules brought in in the US last year have not slowed Bank of Ireland's business there.

The ECB may publish regulatory guidelines to set expectations for the industry, Ms Lautenschlaeger said.

"I do not see it as the biggest risk, but I see a certain danger that market players see things a tad brighter than they are," she said.

"So it is up to me as a supervisor, and up to you as risk managers, to counterbalance this view," she said in a speech to the Global Association of Risk Professionals.

Ms Lautenschlaeger said regulators are acting after the market, which declined following the 2008 financial crisis, began to grow in 2011.

European banks still represent a small part - about 15pc - of the global market for leveraged loans, she said. There are about €400bn in leveraged loans in Europe, according to data compiled by Bloomberg.

"Leveraged finance is certainly not a major supervisory concern at the moment, but the recent development of the relevant market exemplifies the need for good risk governance, a well defined and closely monitored framework for risk appetite and highly assertive risk management," Ms Lautenschlaeger said. (Additional reporting Bloomberg).

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