The ECB wants to impose higher capital requirements on Deutsche Bank and BNP Paribas, believing that these banks have not sufficiently reduced their activities in leveraged loans.
New instructions for banks
At the end of March, the ECB asked banks to tighten up their distribution of leveraged loans, threatening to impose new capital requirements. These loans, which are equivalent to more than 6 times a company's EBITDA (earnings before interest, tax, depreciation and amortization), are mainly used for acquisitions by private equity funds.
The reason for the ECB's request to bank managers is the risk associated with leveraged loans. Although they are supposed to be granted on an exceptional basis, these accounted for half of new transactions between 2019 and 2020, and more than 60% in the first half of 2021, says the supervisor. The authorities are particularly concerned about banks that, in search of high returns, grant credit facilities to companies that are already heavily indebted.
Warnings ignored by Deutsche Bank and BNP Paribas
For several months now, the ECB has been warning institutions against the development of leveraged loans. Certain players, such as Deutsche Bank and BNP Paribas, have particularly drawn the authorities' attention for their heavy involvement in this lucrative business.
The ECB has already made it clear that some banks will have to add capital this year "as part of the SREP process ".
The supervisory review and assessment process assesses the risks faced by banks, and whether they are able to manage them adequately. Depending on the results obtained, it may lead to new capital requirements.
Tension mounts between banking supervisor and financial sector
Interviewed by Bloomberg, Deutsche Bank does not expect a " significant change " in its requirements. BNP Paribas seems to be of the same opinion, pointing out that leveraged loans only account for " a few billion " out of a total loan book of almost 1,300 billion euros. However, bank representatives consider that a reduction in leveraged loan activity would be tantamount to cutting companies off from bank financing.
Christian Ossig, one of the heads of the European Banking Federation, denounces " a supposedly overly broad view of leveraged finance on the part of the authorities ".
To get its message across, the European Central Bank is not keen to penalize the banking sector. When a risk is identified, the idea is to reduce it through dialogue, a formal injunction before a capital requirement.