LONDON (Reuters) – Many banks in the European Union hold huge exposures of risky leveraged loans which may be tough to offload if investor appetite were to evaporate as a result of the pandemic, the bloc’s banking watchdog said on Thursday. FILE PHOTO: European Union flags flutter beyond the European Commission headquarters in Brussels, Belgium June 25, 2020. REUTERS/Yves Herman/File PhotoBanks have discovered the industry offering greater yields at a time of reduced rates of interest, which were cut farther since March as central banks want to mitigate economic downturns after COVID-19 lockdowns. The European Banking Authority (EBA) said exposures in a sample of 26 European Union banks into loans created to highly indebted businesses that typically don’t have an investment grade credit rating, totals 400 billion euros ($470 billion). Even though this is merely 2.5% of the total assets, the holdings are concentrated in a few big and extremely interconnected creditors, EBA explained. “As the pandemic and the ensuing economic lockdown impair leveraged borrowers’ capacities to repay their debts, some banks may suffer losses related to the increase in credit risk and from their mark-to-market positions,” EBA said. “Banks may also face drawdowns on the revolving credit facilities granted to leveraged borrowers and may be left holding leveraged loans that they intended to securitise or sell (hung deals) if investors’ appetite vanishes.” So much, default rates have stayed very low because of reduced aging amounts, but pressures from COVID could alter this, EBA explained. The Bank of England has estimated the international leverage loan marketplace is worth around $3.2 trillion. The BoE along with other central banks across the globe such as the European Central Bank have begun asking banks in their exposures to leveraged loans. “The relaxation of lending standards on leveraged finance has clearly increased the riskiness of these exposures,” EBA stated, adding it was important that all banks’ boards have an entire image of exposures. EBA Graphic on Leveraged Loans – here Reporting by Huw Jones; Editing by Susan FentonOur Standards:The Thomson Reuters Trust Principles.