The European Central Bank (ECB) identified leveraged finance (LF) as a supervisory priority for 2015 and organized a thematic review on this subject as part of the Supervisory Examination Programme (SEP). Approximately thirty banks within the Single Supervisory Mechanism (SSM) with significant leveraged finance business were in scope for this study.
The ECB LF thematic review encompassed two different groups, one subject to a comprehensive review, whilst the other was subject to a simplified assessment.
The ECB does not intend to publish information regarding peer group comparisons of this survey. This contrasts with the approach being taken on the thematic review of governance where overall findings are scheduled to be published.
Understanding your position relative to your peers is a key piece of information for banks to have.
In light of this potential information gap, KPMG’s ECB office proposed to the participating banks to facilitate a pooling of information on a confidential basis regarding their leverage finance activities. After analyzing and processing all the available data, KPMG’s ECB Office performed tailored reports for each participating institution highlighting their own position within the peer group as well as any outlier results requiring intervention.
Insights gained included the diversity of definitions used to define leverage finance activities, varying volumes of activity with diverse market coverage as well as differing approaches to resourcing such activities and strong similarities in the credit risk assessment approach for such deals.
Clients valued the insights that arose from the ability to see their own results against the broader industry. These insights allowed banks to assess their relative importance in the leveraged finance area. The discussion of results with KPMG also allowed banks to anticipate follow-up actions and recommendations from the Supervisor as well as enriching the ongoing dialogue with the ECB.
The benchmark process is a complex one, it is, however, clearly worthwhile and has been successful. Benchmarking will certainly be part of the KPMG ECB Office service to our clients.