ECB plays down PE risk

The European Central Bank’s latest report has argued increased regulation of the private equity industry is not necessary, because the impact of a private equity downturn on the wider financial markets would probably be minimal.

A European Central Bank report has spoken out in support of the private equity industry, claiming that it poses limited risk to financial stability in Europe.

The news follows an earlier IMF report that warned of the dangers of collapsing leveraged buyouts, and follows criticism from a number of politicians across the continent.

In its report, which was based on a survey of 41 large European banks, the ECB argued that “the muted systemic risk potential identified” within the leveraged buyout industry did not warrant increased regulation at European Union level.

The report admitted that the current financial environment “is almost as good as it can get” due to the low cost of borrowing and relatively stable markets. But in contrast to the recent highly critical IMF Global Financial Stability Report, the ECB argued that a change from these benign conditions will not be as dramatic as the industry’s critics fear.

Despite EU and worldwide political pressure for regulation of the industry, the report concluded banks have little to fear from a downturn in the buyout industry. The ECB said that despite banks being a major player in the buyout industry, “(their) relatively low proportion of LBO linked assets compared with total balance sheet sizes (or even own funds) seems to show that the potential for a severe market downturn to have a material impact on their financial accounts is still rather limited.”

However, the greatest risk posed to banks would be if they were caught with a large exposure during a sharp and unexpected downturn. The report warned: “The larger size of the new deals and the complex nature of the most exotic debt packages often make it more time-consuming (for banks) to dispose of all the debt to potential buyers.”