The European Central Bank’s potential restraints on leveraged lending may damp a profitable business for local banks, according to Fitch Ratings.
The regulator intends to propose leveraged-lending guidelines for euro-zone banks before the end of the year, analysts Edward Eyerman and Simon Kennedy said in a Sept. 23 note, citing comments made by an ECB official. The guidelines will mirror U.S. rules that express concern about leveraged deals where a borrower’s total debt exceeds six times earnings, they said.
A similar position in Europe may hit local banks because they play a greater role in leveraged credit than U.S. lenders, the analysts said. It would also add to the challenges facing European banks in leveraged credit markets, which include rising competition from non-bank lenders and borrowers seeking looser terms.
“The introduction of leveraged lending guidelines for European banks would probably have a greater impact on broader European leveraged credit markets than they did in the U.S.,” the Fitch analysts said. The market is “a source of profitability” for many banks in Europe, the analysts said.
The ECB plans to undertake eight weeks of consultation after publishing the draft leveraged-lending guidelines, Fitch said. The new rules will probably go into effect toward the end of the first quarter of next year, it said.