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ECB ups scrutiny of bank loans to high-risk borrowers 

November 23, 2016

Francesco Canepa & Jeremy Gaunt, Reuters

The European Central Bank is increasing scrutiny of bank credit to highly indebted borrowers after finding risky loans have boomed since 2012 due to its own ultra-low interest rates, it said on Wednesday.

The ECB and other major central banks around the world have pushed interest rates to zero or lower to stimulate lending and support economic growth in response to the global financial crisis.

As the low rates ate into their returns, banks have started to lend more to indebted clients, who have to pay more, and ease the terms on these so called "leveraged transactions" to fend off competition.

The volume of these loans rose by 35 percent between 2012 and 2015, an ECB survey of 40 banks found.

So called "covenant-lite" deals, which offer less protection to the lender and were popular in the run-up to the financial crisis, accounted for a significant and growing share of the total, the survey found.

The ECB, which started supervising the euro zone's largest banks two years ago, now wants to increase checks on these loans to stop banks from taking on too much risk and expose Europe to the risk of a new crash.  Read more

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