The European Central Bank(ECB) has asked European banks to give detailed information on their leveraged lending operations as it starts to pay closer attention to a market that has come under regulatory fire in the US, bankers said on Wednesday.
The ECB asked banks in early May to provide information on leveraged loans to non investment-grade or ‘junk’ companies, including private equity buy-outs, and gave a tight deadline of mid June for submissions.
Increased scrutiny by the ECB raises the prospect of European regulation similar to the US leveraged lending guidelines, which were issued in March 2013 and were designed to curb high-risk lending that could pose a systemic risk to the banking sector.
“Obviously the ECB is thinking about leveraged finance and the way they regulate it. I would have thought that the whole question of leveraged lending guidelines will be raised at some stage as it has been in the US,” a senior loan banker said.
European banks have been asked to provide information on leveraged loans that they have arranged or underwritten, the terms of the loans, including leverage ratios and covenants and which investors the loans were sold to, sources said.
The ECB was not immediately available to comment.
The ECB’s request to European banks follows a similar request by the Bank of England in late 2014, when UK banks and other London-based banks were asked for similar information.
The BoE’s Financial Policy Committee (FPC) said in late March when it reviewed its assessment of risks to financial stability that while no action was necessary, it would conduct regular surveys to monitor the leveraged loan market.
“… the UK banking system currently appears resilient to stress in the leveraged loan market. The Committee’s judgement is that at present no action is necessary to mitigate risks in this market,” the FPC said in a statement.
The FPC also said however that if the recent loosening in underwriting standards continued, major banks could face increased risks in stressed and illiquid market conditions, particularly if forced to retain loans intended for distribution to investors.
SCRAMBLE FOR INFO
European banks are scrambling to meet the ECB’s detailed information requests, which they expect to become a regular occurrence.
“Finding the data is going to be a challenge. The data quality will be questionable because the questions are very detailed,” the senior loan banker said.
In the US, the Federal Reserve, the Office of the Comptroller of the Currency and the Federal Deposit Insurance Corp are also stepping up their reviews and the Shared National Credit review to more than once a year, from 2016.
Like the US regulators, the ECB has limited its request to banks, but could extend its remit in the future to non-bank entities, which are currently exempt from regulatory requirements in Europe and the US, bankers said.
The BoE’s recent findings and lack of action may put the ECB under less pressure to implement tough regulations in the short term, banking sources said.
The lack of regulation in Europe’s leveraged loan market, compared to a tough line in the US is creating a competitive advantage for European banks, which are currently able to offer more aggressive terms than US rivals.
“The ECB (is) under less pressure to follow US precedent. That could create a significantly better position for European banks operating in Europe compared to US banks,” a second senior loan banker said.