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ECB Raises Capital Demands for 20 banks over Bad Loans

  • ECB also applies add-ons for leverage
  • Focus remains on credit, liquidity in 2024

FRANKFURT, Dec 19 (Reuters) - The European Central Bank said on Tuesday it had raised capital requirements for 20 banks after judging they had not set aside enough cash to cover for loans that had gone unpaid, a key concern for supervisors after borrowing costs rose sharply.

The move was part of the ECB's push, set to continue next year, to ensure banks are preparing for more delinquencies and tighter liquidity after it jacked up interest rates to fight high inflation.

Presenting its annual evaluation of the euro zone banking sector, the ECB said it had slapped capital "add-ons" on 20 large banks over their bad loans.

"In these cases, a shortfall was identified relative to the ECB's coverage expectations," the euro zone's central bank and top banking supervisor said, without naming individual lenders, as is its policy.

It said there were already some early signs of asset quality deterioration given the weak economic environment and warned this could boost the stock of soured credit.

The ECB also imposed capital charges on eight banks over their exposure to "leveraged finance" - lending to already indebted borrowers.

In addition, it applied an extra capital requirement to six banks, and gave "guidance" to a further seven, for taking on too much leverage or trying to paint an excessively rosy picture of their financial position.

"We focused on persistent, and in some cases long-standing, weaknesses in risk management, governance and internal controls," the ECB's outgoing chief supervisor Andrea Enria said at a news conference.

Enria's term will run out at the end of the year, when he will be replaced by Claudia Buch, currently the vice-president of Germany's Bundesbank.


In 2024, the ECB will keep its focus on credit and liquidity risks, the latter of which was thrown into the spotlight by this year's crises at Credit Suisse and Silicon Valley Bank.

"The higher interest rate environment is expected to increase both the volatility of some funding sources and banks' funding costs in the medium term, just when substantial amounts of central bank funding are to be replaced," the ECB said.

This year, the ECB has told two banks to extend their "survival period", the number of days that their available cash and collateral can buy.

Another bank was told to build a liquidity buffer in a foreign currency.

Banks will also be urged to remediate their "shortcomings" in the management of climate-related risks, the ECB said. It gave them time to do so until the end of next year, with several interim deadlines.

"To support this objective, ECB Banking Supervision stands ready to make use of the tools at its disposal (including, when needed, capital add-ons, enforcement and sanctions and reviews of fit and proper assessments)," the ECB said.

Reporting By Francesco Canepa Editing by Balazs Koranyi, Andrew Heavens and Catherine Evans

Source: Reuters

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