ECB publishes guidance on leveraged transactions

The European Central Bank (ECB) has published guidance on leveraged transactions, with the aim of harmonising the definition of leveraged transactions and ensuring sound and consistent risk management practices.

The publication of the guidance follows a consultation launched in November 2016. The ECB has also published a feedback statement indicating where changes have been made to the guidance following feedback received to the consultation.

The guidance seeks to facilitate the identification of leveraged transactions by means of an overarching definition encompassing all business units and geographical areas, so as to give a bank’s senior management a comprehensive overview of the bank’s leveraged lending activities. It also outlines expectations regarding the risk management and reporting requirements for leveraged transactions. The ECB hopes that use of this guidance will result in more stringent risk management of these exposures, strengthening banks’ ability to operate during an economic downturn and ultimately facilitate lending to leveraged borrowers through the business cycle.

The supervisory expectations expressed in the guidance should be implemented in line with the size and risk profile of banks’ leveraged transaction activities relative to their assets, earnings and capital. The ECB intends to apply the principle of proportionality and adjust its level of intrusiveness depending on the risk profile of banks’ leveraged transaction activities.