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27 January 2014

Reuters: ECB lacks teeth to force banks to accept loan book risks


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Experts say the ECB's AQR could falter because the ECB lacks the power to force bankers, constrained by accounting rules, to accept regulators' views of the risks on their books.


Banks have a legal responsibility to value their own assets in accordance with international accounting rules and cannot simply plug the ECB's valuations into their balance sheets. "The ECB is powerful, but it cannot undo a hundred years of company law", one supervisory source said, speaking on the condition on anonymity since these matters are sensitive.

Banks will still need enough capital to cover the loan-book risks identified by the ECB but the AQR's aim of increasing transparency and investor confidence might fall by the wayside. "It's clearly a sensitive area, apart from Spain we haven't really seen banking regulators get involved in the accounting process across Europe", Tony Clifford, partner in financial services at accountancy firm Ernst & Young, said. In pre-crisis Spain, regulators tried to get banks to set aside extra provisions on top those required by accounting rules. "Banking regulators are likely to have different appetites for pushing these numbers into the accounts", Clifford added.

The accounting rules - International Financial Reporting Standards (IFRS) - which 90 per cent of the ECB's banks report under, have a guiding principle that provisions can only be taken for losses actually incurred, and not for expected losses. Clifford said the main challenge was whether national or European regulators would require banks to make greater provisions than the accounting rules allow.

Another accountancy source said the ECB had indicated it did not want national regulators to push for banks to reflect AQR results in their next financial statements because the concept was too problematic. The ECB declined to comment.

A second European supervisor said a capital rule known as Pillar II would allow regulators to force banks to hold enough capital for risky loans even if they are not reflected in banks' accounts.

Full article



© Reuters


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