ECB Eyes Capital Charges for More Banks on Leveraged Finance

(Bloomberg) — The European Central Bank is escalating its crackdown on leveraged finance by preparing to impose higher capital requirements on more lenders after doing so to Deutsche Bank AG and BNP Paribas SA this year, according to people familiar with the matter.

(Bloomberg) — The European Central Bank is escalating its crackdown on leveraged finance by preparing to impose higher capital requirements on more lenders after doing so to Deutsche Bank AG and BNP Paribas SA this year, according to people familiar with the matter.

The watchdog is likely to apply so-called capital add-ons for 2024 to firms with smaller leveraged finance books if they don’t address its concerns over risks posed by the business, said the people who asked to remain anonymous because the plans are private. 

An ECB spokesman declined to comment. The people didn’t name specific firms. 

Under top bank oversight official Andrea Enria, the ECB is persisting in its effort to rein in the risky-but-profitable business of lending to highly-indebted companies. The campaign has riled European bank executives who contend that the regulator is putting them at a disadvantage to US lenders who dominate the area.

 

Supervisors generally raise the bar for capital to ensure banks have sufficient means to cope with potential losses. It can also deter executives from taking more risks because tougher requirements reduce the amount of equity that can be used to support growth or be paid out via dividends and buybacks.

The capital add-ons at Deutsche Bank and BNP Paribas were intended to be sufficient to gain the attention of management while not having a major effect on overall requirements, Bloomberg reported last year. 

Both Deutsche Bank and BNP Paribas exceed their capital requirements. Deutsche Bank has since scaled back its leveraged finance business.

The ECB has said leveraged loan surcharges will be removed once the relevant banks address the address the issues it identified. In February, Enria cited “weaknesses in their risk appetite frameworks” and “excessive generation of highly leveraged loans.” He didn’t name any banks.

The market for leveraged finance has fallen sharply since the heights of 2020 and 2021. For example, the €64 billion ($70.7 billion) of such debt issued in Europe this year so far — according to data compiled by Bloomberg — is similar to last year but roughly half the volumes over a similar period in 2021, when a low rate environment and central bank stimulus souped up the market for debt and dealmaking.

 

–With assistance from Abhinav Ramnarayan.

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