The European Central Bank will remove a capital surcharge on some lenders after they addressed shortcomings in their leveraged finance businesses.
(Bloomberg) — The European Central Bank will remove a capital surcharge on some lenders after they addressed shortcomings in their leveraged finance businesses.
“Some banks have fixed the problems and will see the capital add-on go away,” Andrea Enria, who chairs the ECB’s Supervisory Board, said in an interview in Frankfurt. “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 and Deutsche Bank AG, arguing they had ignored its warnings to cut risk in 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 Enria’s push for lenders to get a grip on their credit risks.
In a wide-ranging interview, Enria also outlined plans to ease the burden of banks’ annual risk reviews and move away from higher capital requirements as the default tool for pushing lenders to fix problems. Still, capital add-ons will continue to be the best measure in some cases, for instance when it comes to addressing risks from leveraged finance, he added.
Bloomberg reported previously that the ECB is likely to apply leveraged finance surcharges to more firms for next year. Enria confirmed the ECB will continue its crackdown.
“Some that didn’t have the capital add-on but that haven’t fixed the problems we identified last year will probably have a fresh capital add-on reaching them,” he said.
He declined to say how many banks will face such requirements because the ECB has yet to conclude its annual review of the risks banks face.
(Updates with additional comments in fifth paragraph.)
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