The ECB’s banking supervisors are urging Europe’s credit institutions to be more cautious when assessing their default risk.
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(Photo: dpa)
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Frankfurt The banking supervisors of the European Central Bank (ECB) are increasingly dissatisfied with the handling of major European banks with loans to highly indebted companies (leveraged loans).
The central bank has had non-binding recommendations on how banks should assess the risks from this business since 2017. Not all financial institutions adhere to it – the ECB now wants to act more resolutely, as people familiar with the matter told the Handelsblatt.
If the industry’s handling of such risks does not change, the supervisory authority will “not hesitate” to impose capital surcharges as part of the annual intensive supervisory talks, the “Financial Times” quoted an anonymous source as saying. The ECB has the right to require banks to have individual extra capital buffers that go beyond the legal minimum if the risk profile of an institution so requires.
The ECB did not comment on whether or which banks are currently violating the ECB’s ideas. However, a spokeswoman made it clear: “Where banks accumulate risks in lending to highly indebted companies that are not adequately addressed through appropriate risk management practices, the ECB will consider supervisory actions and measures. This includes qualitative and quantitative requirements as well as capital surcharges. ”
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The background to the pressure from the ECB is the concern of bank regulators that Europe’s financial institutions might underestimate the risk content of their lending business. High-ranking bank regulators have recently repeatedly urged banks not to be too optimistic about the risk of insolvency. This also applies to so-called leveraged loans, which include, for example, loans to private equity companies to finance company acquisitions with high leverage.
Different calculation of the debt ratio
Many of these loans have variable interest rates. This means that the debt burden on companies would increase as soon as the central banks raise interest rates.
A controversial issue in the area of leveraged loans, at least last November, was the question of when a company is considered highly indebted and therefore very risky. From the ECB’s point of view, this is the case when a company’s loans and undrawn lines of credit exceed six times its earnings before interest, taxes, depreciation and amortization. Banks, on the other hand, often only consider loans when calculating the debt ratio and leave out the unused but guaranteed credit lines.
In the euro zone, only a few big banks are active in this field, including Deutsche Bank and the French BNP Paribas. The Deutsche Bank did not comment on the guards’ plans.
It was leaked last November that the ECB banking supervisors are not convinced of Deutsche Bank’s risk models. In a non-binding recommendation, the central bank advised the institute to temporarily suspend parts of its leveraged loan business until the institute had improved its risk models. According to reports, the bank refused at the time. Neither the ECB nor the Deutsche Bank had commented on this.
More: Deutsche Bank sets aside 1.8 billion euros for loan losses
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