(Bloomberg) -- A top regulator said the European Central Bank should “correct” its large-scale investigation into risky lending if criticism from banks that the watchdog’s approach was too blunt proves justified.
The ECB is set to delay the findings of the probe in response to an unusual level of criticism from banks, Bloomberg reported last week. The decision means lenders will have to wait until at least September for the final results and is a tacit admission that regulators see some merit in the complaints, according to people familiar with the matter.
“We must look into leveraged loans, but we must do it in a sophisticated way,” Tom Dechaene, a member of the ECB’s Supervisory Board, said in an interview. “If we haven’t done it in a sophisticated way or not sophisticated enough, then we should correct this.”
The review of banks’ lending to heavily indebted companies has reignited tensions that first surfaced two years ago, when several lenders complained about excessive interference by the ECB. One grievance raised this time around is that large parts of the review were conducted by consultants or ECB staff who don’t follow the banks closely, resulting in a perception that they didn’t have a good grasp of individual lenders, people familiar with the matter have said.
The ECB’s review comes after higher interest rates put an abrupt end to an era of cheap credit that had fueled a surge in leveraged buyouts — deals that rely heavily on borrowed money and often use assets of the acquired company as collateral. As borrowing costs rise, many of those companies struggle to refinance, creating default risks for their lenders.
The ECB says loans that lead to a borrower having debt equivalent to more than four times its earnings before interest, tax, depreciation and amortization should be considered “leveraged transactions.” There are exceptions, according to guidance the ECB issued in 2017.
Relying only on such metrics would be misleading, said Dechaene, who is also a director at the Belgian central bank. That ratio has been a point of contention for firms including Deutsche Bank AG, which argue that US regulators aren’t so strict in their definitions.
“I heard of a case where a loan was regarded as leveraged on the basis of the financial ratios, but it was guaranteed by sovereign,” Dechaene said in the interview in Brussels. “There’s no leverage risk there.”
The review comprised about a dozen lenders including Banco Santander SA, BNP Paribas SA, Deutsche Bank, Intesa Sanpaolo SpA, Societe Generale SA and UniCredit SpA, as well as European entities of Bank of America Corp., HSBC Holdings Plc and JPMorgan Chase & Co., people familiar with the matter have said.
Dechaene defended the ECB’s scrutiny of the issue, saying the regulator is “paid to be paranoid” and that banks’ criticism also involved “a fair amount of lobbying by some very big players.” He didn’t name any firms.
Still, he said, it’s important that banks also have the option to sue the ECB if they disagree with its findings in this and other cases.
“If they don’t have this, then we are too powerful and then we can indeed impose our paranoid vision,” he said.
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