The European Central Bank defended its controversial probe into banks’ riskiest loans, declaring the issue of “fundamental importance” given the state of the market and warning that some lenders will have to change their practices.

The probe has sparked fierce backlash from banks, and the ECB has been considering cutting in half its initial request for a dozen banks to set aside an extra €13 billion (US$14 billion) in provisions to cover potential losses on leveraged loans, Bloomberg News has reported.

In a newsletter published Wednesday, the ECB publicly confirmed details of the leveraged-finance review for the first time. It said the exercise was undertaken to “complement” previous work that had shown shortcomings in how banks managed loans to their most-indebted corporate borrowers.

“The prudent risk management of leveraged loans is of fundamental importance to the ECB, as highly leveraged corporates are particularly vulnerable to market volatility, economic cycles and revenue swings,” the ECB said, noting that European banks’ leveraged-finance exposure increased 59% in the five years through the first quarter of 2023.

The ECB said that the dozen banks under review - selected based on the absolute size of their leveraged-finance portfolios or the importance of leveraged loans to their businesses - have already received preliminary results. 

“The review, which is planned to conclude later this year, can result in adjustments in risk classification and measurement at an individual bank level, depending on the findings,” the ECB wrote.

The ECB didn’t name the banks covered by the review. Lenders involved include European heavyweights BNP Paribas SA, Deutsche Bank AG, Societe Generale SA, Banco Santander SA and UniCredit SpA, as well as the EU arms of HSBC Holdings Plc, JPMorgan Chase & Co and Bank of America Corp, people with knowledge of the probe have told Bloomberg.

  - Bloomberg