Leveraged lending and prime brokerage - areas of supervisory concern

In a recently published joint statement, the European Central Bank (ECB) and the Bank of England (BoE) flag prime brokerage and leveraged lending as potential risks to the global economy. The two central banks highlight the fact that some parts of the banking and wider financial system seem to have forgotten the hard lessons of the not-so-distant global economic collapse. Both the ECB and the BoE conclude that banks have increased their risk-taking in the sector, without being backed-up by sufficiently robust risk appetite and risk-management frameworks. The joint statement was accompanied by an ECB letter addressed to the CEOs of significant institutions (SIs) and focusing on ECB’s expectations, particularly with regards to the establishment of risk appetite frameworks for leveraged transactions (LT RAFs) in accordance with the provisions set out in the dedicated ECB Guidance on leveraged transactions.
In this alert you will read more about the supervisory expectations concerning leveraged lending and ECB’s intentions in terms ensuring adequate compliance.