The ECB warns of the risk of increasing leverage in the markets

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Rome, Jul 2 (EFECOM) .- The president of the Supervisory Board of the European Central Bank (ECB), Andrea Enria, warned today of the growing “appetite for leverage” that is being experienced in recent times in risk credit markets and equities, and said they can pose a threat to financial stability.

“We must heed the warning signs of increasing leverage, financial complexity and opacity that create the potential for a dangerous combination of risk factors. Banks are not alone behind these trends, but they appear to be shaping them through their management. of risks and their commercial strategy choices “, Enria explained by videoconference at the Università degli Studi di Napoli Federico II.

“The concrete signs of accumulation of risk have become evident in the risky asset segments of leveraged debt and equity-related derivatives, which merit intensified supervision,” he added in his intervention.

He indicated that in recent months “leveraged loans were signed to attract companies with increasingly higher levels of leverage, as evidenced by the outstanding debt of borrowers that becomes an increasing multiple of their earning capacity.”

“Thanks to public interventions, leveraged loan defaults have remained below those seen during the great financial crisis. However, the underlying credit quality deteriorated and corporate leverage increased over the course of 2020,” he said.

“Leverage … is also manifested in the equity market, where participants around the world have increased their exposure to financial products with intrinsic leverage, such as equity derivatives,” he continued.

The president of the European Supervisory Council admitted that “the worst phase of the covid-19 pandemic appears to be over and consensus forecasts point to a strong and rapid economic rebound.”

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He said that the banks are “resistant and well capitalized”, and reiterated the message already announced by the president of the ECB, Christine Lagarde, that the recommendation not to distribute dividends is expected to expire on September 30, given the better evolution of the health and economic crisis.

“We will return to our regular scrutiny of dividends and share buybacks, based on a careful prospective assessment of each bank’s individual capital planning. But we expect distribution plans to remain prudent,” he argued.

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