Frankfurt (Reuters) – Deutsche Bank’s business with high-risk loans remains a thorn in the side of supervisors.
The European Central Bank (ECB) is demanding an additional capital surcharge from the institute, said two people familiar with the processes. The additional requirement had been issued because, from the supervisors’ point of view, Germany’s largest financial institution had not adequately addressed the risks in the business overall. The ECB declined to comment. Deutsche Bank declined to comment on the regulator’s decision. The ECB has been responsible for overseeing the major banks in the euro area since autumn 2014. There are currently 110 institutions that it directly supervises.
In general, Deutsche Bank does not expect any substantial changes in the CET1 capital adequacy requirements or any significant impact on the business strategy, said a spokesman for the institute. “We recently made it clear that due to the current market environment, we have deliberately throttled our leveraged debt capital markets (LDCM) business,” the spokesman said, referring to the high-risk loans. At the same time, the bank remains committed to the LDCM business, which remains a core part of the offering. The Bloomberg agency first reported on the ECB decision.
Deutsche Bank CEO Christian Sewing criticized the strict regulation at an industry meeting in mid-November. “The penalty buffers imposed by European regulators make it harder for local banks to compete in this area,” Sewing said. High-risk credit is a legitimate segment that is playing an important role in the economic recovery.
Addressing weaknesses in institutions’ risk lending business (leveraged lending) is one of the priorities of the regulator for the years 2022 to 2024. It wants to ensure that the banks operate appropriate risk management in this business with borrowers with poorer credit ratings. According to the ECB, the major banks in the euro area recently held more than half a trillion euros in high-risk loans – an increase of 80 percent compared to 2017.
Leverage must be between 2 and 20
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