– with potential that other markets can only dream of. after contracting sharply during the financial crisis, it has expanded rapidly in recent years, not least driven by a search for yield against the backdrop of a prolonged period of very low interest rates. according to a study by credit suisse, the global market for leveraged finance grew by almost 42 % between 2011 and 2014. banks in the euro area followed that trend – between 2012 and 2014, they increased their exposures to leveraged loans by 16 %. do i worry about leveraged finance in the euro area? by comparison, the share of euro area banks in the global market for leveraged finance remains limited. in 2014, banks in the euro area accounted for no more than about 15 % of all leveraged loans that were arranged at the global level. at the same time, leveraged finance accounts for just 1 % of their assets. nevertheless, akin to efforts in the united states, european banking supervision decided to look closely at these exposures – taking a forward - looking and pre - emptive approach. the growth of the market indeed seems to be driven by a search for yield. and on the face of it, leveraged finance does provide comparatively high yields. in 2014, leveraged - finance products generated more than €5 billion of net revenues for european banks. in particular, leveraged finance offers an opportunity to increase fee incomes. accordingly, the volume of underwritten transactions has increased by 35 % since 2012, whereas the volume of deals that banks hold in their own books has only increased by 16 %. it would appear that banks are doing it for the fees. still, other factors besides a search for yield are driving the market for leveraged finance : corporate refinancing schedules, for instance. in 2014, about 52 % of transactions took place in order to renew or refinance previous deals. also, greater confidence among investors might play a role. rating agencies, banks and investment funds have communicated profusely on low default rates and the general attractiveness of the market for leveraged finance. however, the border between confidence and overconfidence is hard to define. therefore, the question is : should we keep an eye on leveraged finance? my answer as a supervisor is : yes, we should. leveraged finance is certainly not a major supervisory concern at the moment, but the recent development of the relevant market exemplifies the need for good risk governance, a welldefined and closely

assessments, conservative collateral valuations, continuous monitoring of the borrower ’ s risk profile, and rapid reactions to changing circumstances. addressing risks – risk management and banking supervision the market environment i just described undoubtedly calls for effective risk management in order to curb potential excess. however, with regard to leveraged finance, risk managers find it difficult to appropriately and effectively play their role in a market environment characterised by fierce competition. more specifically, there are three areas where we are currently pushing for improvement. first, with regard to procedure, historical credit norms are beginning to weaken and more market - friendly structures have been adopted – i already mentioned the covenant - lite issue. in that regard, the thorniest aspect is the credit approval process. the speed of credit approval has become a cornerstone of competitiveness in the market for leveraged finance. in order to increase their market share, banks have significantly shortened their internal validation process. anecdotal evidence suggests that many deals are presented by the borrowers as “ take it or leave it ”. in some cases, potential borrowers requested approval within 48 hours. to me, it seems rather challenging to properly understand a deal within 48 hours – both for the front office as well as for risk management. second, with regard to limits, risk managers need to be alert regarding a shift towards structures that support an expanding business. most banks have limits in place with regard to exposures held on their own books. however, these limits have sometimes been shifted upwards to accommodate business needs and the prospect of rewarding transactions ; the underwriting limit, for instance, has on average increased by 49 % between 2012 and 2014. in such circumstances, risk managers should ensure that stress tests adequately reflect the higher limits. in any case, from a supervisor ’ s perspective, large underwriters could be expected to avoid too much fluctuation in their limits. third, with regard to stress testing, all banks should conduct dedicated stress tests for their leveraged finance portfolios – i mentioned that before. such stress tests are helpful in identifying the consequences of downturns in the markets. therefore, as part of our planned supervisory actions, stress - testing frameworks will be strengthened, particularly with regard to the underwriting pipeline. to sum up : the european market for leveraged finance has grown, and european banks have increased their exposure to it. we as supervisors are closely monitoring these developments. but we go beyond mere observation ; we are also acting, combining individual and ssm - wide