Deutsche Bank AG is likely to win a reduction in the capital surcharge for its leveraged finance business from the European Central Bank, potentially mitigating a source of friction between the German lender and its top regulator.
(Bloomberg) — Deutsche Bank AG is likely to win a reduction in the capital surcharge for its leveraged finance business from the European Central Bank, potentially mitigating a source of friction between the German lender and its top regulator.
The ECB is preparing banks’ individual capital requirements for next year and progress Deutsche Bank has made in curbing risks related to leveraged lending means officials will probably lower a so-called capital add-on for the business, according to people familiar with the matter. The lender however still isn’t in full compliance and the ECB is likely to keep much of the surcharge, said the people, who asked to remain anonymous as the matter is private.
An ECB spokesman declined to comment, as did a spokesman for Deutsche Bank.
The lucrative business of lending to highly-indebted companies emerged as a flash point last year as banks pushed back against what they viewed as excessive interference by the ECB. Deutsche Bank Chief Executive Officer Christian Sewing said his firm didn’t need warnings from the regulator on how to handle the risks it faces from leveraged loans. Yet Andrea Enria, the ECB’s top bank oversight official, told Bloomberg last week that he isn’t letting up.
Read More: ECB Will Remove Leveraged Loan Capital Charge for Some Banks
Deutsche Bank shares extended gains after the report, trading at €9.93 as of 12:23 p.m. in Frankfurt. The shares have declined more than 6% this year.
The ECB is set to communicate individual capital requirements to banks later this year and the size of any reduction depends on Deutsche Bank’s efforts, said the people. The ECB hasn’t decided on the surcharge yet and could still change its view on how much progress Deutsche Bank has made, one person said.
Deutsche Bank saw its requirement rise to 2.7% of risk-weighted assets this year from 2.5% for last year. The lender said the increase was driven by the watchdog’s “assessment of risks stemming from leveraged finance activities.” Eliminating that surcharge altogether would free up more than €700 million ($752 million) of capital, according to Bloomberg calculations based on data from the end of June. The reduction Deutsche Bank may receive now wouldn’t achieve all of that effect.
Other banks are set for more relief after remedying deficiencies identified by the regulator.
“Some banks have fixed the problems and will see the capital add-on go away,” Enria, who chairs the ECB’s Supervisory Board, said in an interview in Frankfurt last week. “Others have not and will keep it for a bit longer.”
Enria didn’t name any of the banks involved. Bloomberg has reported that the ECB raised capital requirements for lenders including BNP Paribas SA as well as Deutsche Bank over their leveraged finance businesses.
Read More: ECB Eyes Capital Charges for More Banks on Leveraged Finance
European lenders have in recent years piled into credit for highly indebted borrowers, which were often the subject of private equity takeovers, as they sought to compete with US firms in an area that can generate high fees and help them win other business. The ECB raised concerns as far back as 2017 and the issue became emblematic of the watchdog’s push for lenders to get a grip on their credit risks.
Deutsche Bank exceeds its capital requirements and is paying out money to shareholders via dividends and share buybacks.
Read More on Leveraged Loans
ECB Hits BNP, Deutsche Bank With Leveraged-Loan Capital Charges
Deutsche Bank CEO Tells ECB It Doesn’t Need Warnings on Risk (2)
(Updates with shares in fifth paragraph)
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