Risky corporate loans: BNP Paribas risks higher capital requirements

BNP Paribas is logically in the viewfinder. At the end of March, the European Central Bank (ECB), which supervises the banking sector in the euro zone, had written to the leaders of the establishments of the Old Continent to ask them to better regulate their policy of distribution of leveraged loans, useful particularly in LBO transactions.

However, according to Bloomberg, the French bank – and its very conquering investment bank – would be among the most concerned. It would indeed figure prominently in an internal ECB ranking of the institutions most involved in this very lucrative but also very risky activity, the pace of which has however slowed considerably since the outbreak of the war in Ukraine.

“It is normal that the biggest players in this market such as Deutsche Bank or BNP Paribas particularly attract the attention of the gendarmes”, agrees a banking source. Contacted, neither BNP Paribas nor the ECB commented. In addition to American banks, which are very active in this segment in Europe, UniCredit, Intesa Sanpaolo and HSBC are among the main players, according to Dealogic data.

Six times EBITDA

In his March 28 letter to bank executives, Andrea Enria, Chairman of the ECB’s Prudential Supervisory Board, was moved across the sector by a “risk appetite close to or equivalent to the highest level observed since the Great Financial Crisis.

Leveraged financing is one of the main vulnerabilities of systemic banks

Andrea Enria ECB

In his eyes, he wrote, “leveraged financing is one of the main vulnerabilities of systemic banks”. The explosion of loans whose amount exceeds six times the Ebitda (operating result) concentrates the concerns. Supposed to be granted in an “exceptional” way, these weighed half in new transactions between 2019 and 2020, and more than 60% in the first half of 2021, continues the supervisor.

Since then, leveraged finance has slowed sharply since the start of the year, according to Dealogic. The sector generated $600 million in revenue in Europe – all banks combined – in the first quarter, down 44% year-on-year.

“The idea is not to pile up equity”

This increased attention to BNP Paribas means that the establishment can expect new capital requirements (to be placed against these exposures), unless it adapts its portfolio.

The capital requirement remains one weapon among many others, according to a good connoisseur of supervision. When a risk is identified, the idea is to reduce that risk, not simply pile up equity. In this context, the ECB has a gradual approach: dialogue, formal injunction, before arriving at a capital requirement.

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