LONDON: The European Central Bank (ECB) has defended efforts to rein in the risk that lenders are taking in leveraged finance after the financial services industry said that the tough tack is harming banks and borrowers.

Lending to those that are ultimately unable to pay “is something that is only going to hurt the real economy,” Elizabeth McCaul, a member of the ECB’s supervisory board, said at a conference.

Several European lenders have been piling into the business of extending credit to highly indebted borrowers, seeking higher returns after years of low interest rates.

That’s alarmed ECB regulators and prompted them to warn that banks found to be taking too much risk face stricter capital requirements.

McCaul was responding to comments by Christian Ossig, chairman of the executive committee at the European Banking Federation, who said the ECB’s approach could cut off companies from funding.

The regulator’s definition of leveraged loans goes beyond “classical leveraged finance” involving buyout firms and captures “a large part of the European corporate world,” partly because of requirements during the pandemic, he said.

Elena Carletti, a finance professor at Bocconi University who also sits on UniCredit SpA’s board of directors, also questioned the ECB’s criteria on leveraged lending.

“I think the ECB should make clear what a leveraged transaction is and possibly go for a definition that doesn’t incorporate lending also to highly indebted corporates,” she said.

“As a result of the pandemic, we know that corporate indebtedness has increased.

“If we now incorporate that into the definition of a leveraged transaction, we really risk cutting corporations off from funding,” she added.

Carletti said at the beginning of the panel that she was speaking in a personal capacity, rather than as an advocate for the industry.

McCaul rejected the idea that the ECB was using an outdated approach.

She said there was no trade-off between “sound” credit risk management and financial stability and ensuring banks lend to the economy.

At a separate conference, ECB supervisory board member Edouard Fernandez-Bollo said the ECB was focused on reining in excessive risk-taking rather than forcing European banks to withdraw from leveraged finance.

“We are trying to concentrate on the outliers to be sure precisely that outliers don’t lead the market astray,” he said.

“That’s in reality in the interest of the market, that we concentrate our action in the outliers that are maybe making the market more dangerous for everyone.”

 - Bloomberg