(Bloomberg) -- The European Central Bank is confronting a fresh wave of criticism from banks over how it supervises the industry, amid a clampdown on a risky type of lending.

The gripes reflect renewed discontent with an approach to oversight that some bankers perceive as overly bureaucratic and not pragmatic enough, especially when compared with US authorities. Similar accusations surfaced about two years ago when leaders at firms including Deutsche Bank AG and Societe Generale SA aired irritation with what they saw as excessive interference. 

Their criticism subsided after ECB implemented some reforms and the failure of several lenders in other jurisdictions last year made an argument in favor of strict oversight. Now bankers are becoming more vocal again as the ECB’s new top regulatory official, Claudia Buch, continues what she calls an “intrusive” approach to oversight.

Some of the issues raised by the banking industry in 2022 are “resurfacing,” Gonzalo Gasos, an official at the European Banking Federation, said in an interview. “They have to do with comparisons between European banks and their global peers.”

This time, the frustration of executives stems largely from the ECB’s review of lending to heavily indebted firms, known as leveraged finance. Multiple banks have used a standard feedback opportunity to complain by letter about the way the watchdog carried out the probe, according to people familiar with the matter. While it’s common for banks to push back, their unhappiness is also directed at the ECB’s approach and not just the findings, they said, asking not to be named as the matter is private. 

One grievance raised by banks is that large parts of the review were conducted by outside consultants or ECB staff who don’t follow the banks closely, resulting in a perception that they didn’t have a good understanding of how the individual lenders engage in the business, said the people. Numerous lenders also criticized the probe for labeling some loans as nearing default or in default even though the companies in question continue to service the debt, they said. 

“European supervision helps keep banks safe and sound,” an ECB spokesman said in a statement to Bloomberg. It has “demonstrated its decisiveness and agility in swiftly responding to a series of external shocks: the pandemic, the war in Ukraine, the shift in the interest rate environment, the 2023 banking turmoil.”

Conflicts between banks and their regulators take place in other regions as well. Yet challenging lenders was a key reason why the ECB assumed direct oversight of the industry a decade ago from national regulators who were seen as having too cozy a relationship with the firms. Buch, who took over this year, says more resilient banks are better able to compete internationally and wants to ensure that lenders can contend with new risks, such as from climate change.

That focus has added to irritations among bankers. Four banks breached ECB-set deadlines to address perceived failures in preparing for climate risks, setting them up for financial penalties after multiple warnings, Bloomberg reported previously. 

Some of these banks, which are from Spain, Malta, Latvia and Lithuania, are angry because they’re concerned about damage to their reputation, people familiar with the matter said now. Further banks from countries including Austria and Germany have been informed that they, too, are at risk of penalties, said these people.

There’s also frustration among several banks over the time it takes the ECB to examine and approve so-called internal models that determine how much capital they need, the people familiar with the matter said. The process can drag on for years, one person said. A number of lenders including Deutsche Bank and Nordea Bank Abp have disappointed investors after holding off on fresh share buybacks over reviews of their risk models.

“We should take what the Americans are doing as a role model,” Deutsche Bank Chief Executive Officer Christian Sewing said at a conference last week. “If you look at the Fed’s rules, stability and robustness are in the foreground, but there’s a third word and that’s ‘competitiveness.’ The Fed pays attention to US banks being regulated in a way that allows them to remain competitive. That word doesn’t exist in any European regulation.”

To be fair, European authorities have shown they can exercise some of the flexibility the industry has called for. The European Commission said this week that it will delay a key part of global bank capital rules by a year, so that the bloc’s lenders won’t be put at disadvantage to US competitors.

The ECB has said it’s working on efficiency in model assessments, but that improvements also depend on banks ensuring their applications “are of good quality and are submitted in time.”

However, the leveraged finance review currently seems to be a big source of unhappiness for banks. Multiple firms have taken issue with the methods that were fundamental to the probe. 

An official at one lender said that several borrowers were deemed to be at risk of default even though their securities were trading at par. That is generally a sign that credit investors aren’t concerned about financial stress, although the riskiness of loans will depend on the terms they are made at. 

Another banker said the ECB called for higher provisioning on loans after a borrower had breached a single, minor term known as debt covenant, even though the company was still continuing to pay back the principal. At least one smaller lender dialed back its leveraged lending business as a result of the threat of higher provisions, one person said.

The ECB is likely to take on board some of feedback, meaning provisioning is likely to be lower than initially demanded, said one of the people. The ECB’s own, 2017 guide on leveraged loans states that banks need to track any breaches of covenants and conduct so-called impairment tests when they are “material.”

--With assistance from Jorge Zuloaga, Esteban Duarte, Alexandre Rajbhandari and Kamil Kowalcze.

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