BNP Paribas has said it will face increased capital requirements next year after the European Central Bank toughened its view of the bank’s risk profile.
France’s largest listed lender said it would have to keep its common equity tier one capital ratio at 9.56 per cent of its risk weighted assets from January, up from 9.27 per cent previously, following an annual review by the regulator.
The bank did not specify what particular risks the ECB had zoomed in on to justify the increase, adding that it was well equipped to manage the new requirements. Its CET 1 had reached 12.1 per cent at the end of September.
But the increase comes after several warnings from Europe’s top financial regulator over potential risks in the sector and particularly banks’ exposure to leveraged loans, which are usually used to back private equity buyouts or given to highly indebted corporate borrowers.
Andrea Enria, chair of supervision at the European Central Bank, had urged some of the biggest banks in the sector in February to reduce those exposures, saying regulators could otherwise use “the capital stick”.
In an open “Dear CEO” letter in March to the biggest leveraged loan lenders in Europe — which include BNP as well as Deutsche Bank and some US banks — Enria pointed to the weakened terms and reduced protections for lenders attached to some deals as one sign of excessive risk taking.
The ECB declined to comment further on the increased demands for BNP. BNP said in a statement that its required so-called Pillar 2 buffer — which is specific to individual lenders and meant to cover risks considered to be underestimated or not covered elsewhere — would rise to 0.88 per cent in 2023, from 0.74 per cent in 2022.
The ECB also raised its capital requirements for Italy’s UniCredit in December.
Underwriting of leveraged loans globally has dried up in the second half of the year as central banks raise interest rates to combat inflation. Yet higher rates also raise the risks that large debt loads could become harder to manage for existing borrowers.
Across Wall Street and in the European market, banks have been writing down some of their leveraged finance positions in recent quarters, after they struggled to sell on some of the debt and had to hold it on their books. BNP, which normally holds on to the positions it takes, also said in the third quarter it had marked down some of its positions.