New regulations, if enacted by the European Central Bank, could scupper the leveraged loan market in Europe.
According to Sabine Lautenschlaeger, the vice chair of ECB’s supervisory arm, an individual lender’s exposure to a risky loan would be monitored closely to prevent the risks from spreading onto the markets. Leveraged loans, along with other risky debt instruments, are often used to finance corporate buyouts.
Regulators were acting after the market for leveraged debt, which declined following the 2008 financial crisis, began to grow in 2011. European banks had increased their exposure to leveraged-finance products, to generate net revenue of more than €5bn ($5.4bn) in 2014.
European banks continue to represent about 15% of the global market for leveraged loans with about €400bn loans outstanding.