ECB Steps Up Scrutiny of Loan Risk Before Potential Defaults

The European Central Bank is stepping up its scrutiny of credit risk at banks across the continent to get a better sense of their preparation for a potential wave of loan defaults triggered by the pandemic.

Officials from the ECB and national watchdogs are pushing lenders including BNP Paribas SA, Societe Generale SA and Deutsche Bank AG for additional information on their corporate lending in 2020, people familiar with the matter said. It’s part of an effort to ensure that lenders can withstand a possible surge of defaults, they said, asking not to be named discussing a private matter.

ECB Supervisory Board Chairman Andrea Enria has repeatedly warned that the pandemic may cause non-performing loans at banks to soar once government relief programs run out, and has urged lenders to brace for that scenario. He’s also expressed concern about the different methods banks are using to account for credit risk and provisions.

An ECB spokeswoman declined to comment on individual banks, referring Bloomberg to a letter written by Enria in December in which he urged lenders to accurately monitor the build-up of bad loans. Representatives for BNP, Societe Generale and Deutsche Bank declined to comment.

“Investors have been left scratching their heads about the disparity of loan loss provisions across banks,” Osman Sattar, an analyst at S&P Global Ratings, said in an interview earlier this month. During the upcoming earnings season, “they’ll be looking at whether banks that didn’t have big upticks in provisions will be playing catch-up.”

Ten of Europe’s biggest lenders probably set aside another $15 billion for doubtful credit in the fourth quarter, according to analyst estimates compiled by Bloomberg. By contrast, many of the top U.S. banks bolstered profit in the period by releasing reserves made earlier in the year.

The ECB is undertaking a series of actions to ensure banks’ capital cushions are strong enough to withstand a severe economic blow. While it continues to constrain dividends and bonuses, the ECB is also considering tighter capital requirements for banks that don’t adequately manage their leveraged finance risks.

The ECB is “challenging” banks on how much risk they want to take in leveraged loans and how they stress test their holdings, executive board member Frank Elderson told the European Parliament on Monday. The supervisor “will not shy away” from slapping higher capital requirements on banks if they’re found to be deficient.

©2021 Bloomberg L.P.

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