(July 15): The European Central Bank (ECB) is set to delay the outcome of a large-scale investigation into high-risk loans, a tacit admission that it sees complaints from several banks about the probe as merited.
The ECB will likely hold off from relaying the final results of the leveraged-finance review to lenders until at least September, after initially planning to do it around this month, people familiar with the matter said. The decision is a direct response to an unusual level of criticism from banks included in the investigation about the way it was carried out, the people said, asking not to be identified discussing the private information.
The regulator will also probably lower its demands for banks to make additional loan loss provisions, compared to the initial findings it conveyed to them earlier this year, the people said. It’s in touch with the affected banks about potential solutions to the frustration created by the probe, two of them said.
An ECB spokesman declined to comment.
The delay in response to bank criticism indicates that the dissatisfaction communicated by the banks is substantially stronger than the typical level of pushback. It also signals an admission on the part of the ECB that the investigation may have had shortcomings.
Bloomberg News reported last month that the clampdown on leveraged loans had sparked criticism from banks, with several using a standard feedback opportunity to complain by letter about the way the watchdog carried out the probe. The unhappiness was also directed at the ECB’s approach and not just its findings.
One grievance was that the review was largely conducted by outside consultants or ECB staff who don’t follow the banks closely, resulting in a perception that they didn’t have a good understanding of how the individual lenders engage in the business, people familiar with the matter said at the time. Numerous banks also criticised the probe for labelling some loans as nearing default or in default even though the companies in question continue to service the debt.
Some regulatory officials have since faulted the review as well, saying its design opened the ECB to complaints, the people said now.
The review comprised about a dozen lenders including Banco Santander SA, BNP Paribas SA, Deutsche Bank AG, 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, the people said.
HSBC didn’t respond to a request for comment. Representatives for the other banks declined to comment.
The ECB probe happened after higher interest rates put an abrupt end to an era of cheap credit that had fueled a surge in leveraged loans — a type of credit typically used in private equity deals that pile a large amount of debt on the acquired company. Many of those companies now face much higher borrowing costs and a lower willingness among banks to provide more credit, resulting in higher default probabilities.
It’s not the first time that a so-called credit-file review by the ECB leads to controversy. A probe last year of loans to property conglomerate Signa sparked concerns among some regulators about the risk of being seen as stigmatising a borrower in the eyes of its lenders.
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