The European Central Bank (ECB) wants to put a damper on themarket for leveraged loans even before it heats up.

Banking supervisors will look at individual lenders' exposure tothe loans, which are often used to finance corporate buyouts, andother risky debt to preempt the threat that risks could quicklymount in the market, Sabine Lautenschlaeger, vice chair of theECB's supervisory arm, said in New York on Tuesday. The ECB alsomay publish regulatory guidelines to set expectations for theindustry, she said.

“I do not see it as the biggest risk, but I see a certain dangerthat market players see things a tad brighter than they are,”Lautenschlaeger said. “So it is up to me as a supervisor, and up toyou as risk managers, to counterbalance this view,” she said in aspeech to the Global Association of Risk Professionals.

Lautenschlaeger said regulators are acting after the market,which declined following the 2008 financial crisis, began to growin 2011. Banks have increased their exposures to leveraged-financeproducts, which have generated more than 5 billion euros (US$5.4billion) in net revenue for European banks in 2014, she said.

European banks still represent a small part—about 15 percent—ofthe global market for leveraged loans, she said. There are about400 billion euros in leveraged loans in Europe, according to datacompiled by Bloomberg.

“Leveraged finance is certainly not a major supervisory concernat the moment, but the recent development of the relevant marketexemplifies the need for good risk governance, a well defined andclosely monitored framework for risk appetite, and highly assertiverisk management,” Lautenschlaeger said.

–With assistance from Rebecca Christie, Jeanna Smialek,Alessandro Speciale and John Glover.

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