(Bloomberg) -- European Central Bank officials are discussing asking banks to add about €7 billion ($7.6 billion) in provisions for leveraged loans going bad, roughly half what it had initially estimated, after its in-depth review of the business sparked a backlash among lenders.
The ECB originally targeted as much as €13 billion in additional reserves but the team carrying out the work is now proposing to cut that amount, according to people familiar with the matter. Several officials had called for the figure to be reined in, the people said, asking for anonymity to discuss internal debates.
The amount isn’t final and may still change. The reduction also reflects an improvement in the quality of some loans and changes in banks’ loan books since June of last year, the cut-off date the ECB used for its review, said two of the people.
An ECB spokesperson declined to comment.
Bloomberg previously reported that the supervisor was set to lower its initial demands, after an unusual level of criticism from banks prompted the regulator to delay its findings. The review, which focused on a dozen banks, has reignited tensions that first surfaced two years ago, when several lenders complained about excessive interference by the ECB.
ECB officials are set to discuss the findings of the probe next week as they work toward finalizing their demand, said one of the people. Lenders will have to wait until at least September for the final results, people familiar with the matter said previously. The ECB had conveyed its initial findings to banks earlier this year.
The banks involved include some of the euro zone’s biggest lenders like Deutsche Bank AG and BNP Paribas SA as well as the EU entities of international banks including JPMorgan Chase & Co., Bank of America Corp. and HSBC Holdings Plc, people familiar with the matter have said.
One grievance raised by banks is that large parts of the review were conducted by consultants or ECB staff who don’t follow the lenders closely, resulting in a perception that they didn’t have a good grasp of individual banks, people familiar with the matter have said.
In an interview with Bloomberg TV on Wednesday following second-quarter earnings, Deutsche Bank Chief Financial Officer James von Moltke said there are differences in opinion when it comes to provisioning.
“It’s a vigorous debate with the inspection teams and in looking at those methodologies in the results,” he said. “We’ll always take feedback and then react as we see fit. We think the allowance that we operate with, that we have today, is prudent and adequate for the risks we see in all of our books, including leveraged lending.”
It’s “appropriate” for the ECB to ensure banks have a handle on their risks and Deutsche Bank has put in place “process and underwriting changes” that the watchdog had previously sought, said von Moltke.
“Leveraged lending is an important part of our business, in engagement with clients,” he said. “It’s something we want to continue to participate in, we think we’re good at.”
Tom Dechaene, a member of the ECB’s Supervisory Board, said in a recent interview that if such criticism proves accurate, the supervisor should correct its approach.
The ECB can’t force banks to make provisions, but if they don’t accept the supervisors’ advice, it can deduct corresponding amounts from their capital, leaving them with less money to support lending or make shareholder payouts.
Any extra provisions could be recognized over a multiyear period, one of the people said.
--With assistance from Oliver Crook and Arno Schütze.
(Updates with comments from Deutsche Bank CFO in starting in ninth paragraph)
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