ECB Capital Definition Tougher in Stress Test Than Review

European banks should give investors more information about the bad debt on their books, the Europe Union’s top markets regulator said, as lenders prepare for a series of regulatory reviews looking at financial risks.

Around a third of the 39 banks examined by the European Securities and Markets Authority didn’t provide enough information on unpaid loans, the agency said. Lenders should also disclose more information on how they renegotiate terms with borrowers struggling to repay their loans, and how they hedge sovereign debt holdings with derivatives to give a more accurate picture of credit risks, ESMA said in a report today.

The European Central Bank will take on oversight of the region’s financial system to prevent a repeat of the turmoil that set off the euro area’s worst recession since World War II. The ECB will examine banks’ balance sheets and how risky they are during 2014. The European Banking Authority will then help conduct a series of stress tests.

Accurate financial disclosures “play a key role in maintaining both investor and market confidence, which in turn contributes to financial stability and promotes sound economic growth,” Steven Maijoor, chairman of ESMA, said in an e-mailed statement.

To contact the reporter on this story: Ben Moshinsky in London at bmoshinsky@bloomberg.net

To contact the editor responsible for this story: Craig Stirling at cstirling1@bloomberg.net

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