ECB Said to Have Raised Concern Banks Could Mask Losses for 2017

(Bloomberg) -- The European Central Bank alerted auditors that lenders could try to take advantage of the transition to new accounting standards to spread the hit on loan losses over years instead of reflecting them in their 2017 financial results, three people familiar with the matter said.

The ECB’s Single Supervisory Mechanism, which oversees the region’s largest banks, flagged the risk earlier this year as part of its regular dialogue with the accountants that audit lenders’ balance sheets, said the people, who asked not to be identified because the discussions are private.

The change to new accounting rules could lead banks to classify bad loans in a way that allows for provisions to be spread out over a five-year period instead of taking an immediate hit, said the people.

The SSM sounded the warning to caution banks not to mask losses as they were finalizing their 2017 financial results, one of the people said. The person didn’t clarify how the concerns have been addressed and whether the SSM is satisfied with how banks have reported their 2017 figures.

Capital Charges

An official for the ECB in Frankfurt declined to comment.

The SSM also informed the European Banking Authority, which oversees the EU’s banking rules, of its concerns, said the people. In its discussions about the issue, the SSM’s board agreed that the supervisor could impose additional capital charges if it found capital savings that weren’t justified, a fourth official said.

The new accounting standard IFRS 9, which takes effect this year, requires lenders to reserve against expected loan losses. EU legislators decided to allow a five-year period during which the impact of increased provisions is phased in.

European lenders are bracing for a Europe-wide stress test of their balance sheets later this year, which will also gauge the impact of the new accounting rules for bad loans. While the continent’s strengthening economic recovery has helped boost profits, the need to provision for a legacy of bad loans has weighed on the balance sheets of lenders -- especially in Italy, Greece and Cyprus.

©2018 Bloomberg L.P.