The ECB will come to the banks to surf the market, Enria tells Reuters

FRANKFURT (Reuters) – The European Central Bank intends to downgrade banks that take too much risk through financial instruments, such as loans and capital-linked derivatives, ECB senior official Andrea Enria said on Friday.

Enria said there is evidence that despite the pandemic, banks have become happy and risk-averse after years of low interest rates and rising stock markets, collateral lending obligations, capital swaps and loans to customers who were already in debt fell.

“In our view, specific signs of increased risk have been revealed in the risky asset segments of derivatives related to debt and assets, which require increased supervision,” Enria said in an academic speech via the weblink.

The warning warned that it will end when public support measures to combat the pandemic are withdrawn or when investors expect inflation to accelerate and demand higher interest rates.

This would affect banks both through direct holdings and through exposure to shadow banks, which are investment funds that expand credit, Enria said.

“In important areas such as funded financing … we plan to expand the full range of supervisory tools available to us, including minimum capital requirements that match the specific risk profile of each bank, if necessary,” he added.

The ECB has told Deutsche Bank AG (NYSE 🙂 it will probably need more capital to consider the risk of leveraged loans, Bloomberg News reported last week, citing people who knew about the issue.