ECB Urged to Use Single Rule on Bad Debt for Bank Exams by EBA

The European Union’s top banking regulator urged the European Central Bank to use its standards on how to classify bad debt for a health check of lenders’ balance sheets next year.

The European Banking Authority also said the examination, known as the asset quality review, should be completed by October 2014 to give the EBA time to use the data in stress tests next year. The agency proposed that supervisors consider any loan more than 90 days overdue or “from any debtor assessed as unlikely to pay its credit obligations in full” as non-performing, the London-based EBA said.

“The aim of these recommendations is to contribute to a coordinated approach in the way competent authorities evaluate banks’ credit portfolios,” the EBA, set up in 2011 to harmonize banking rules across the 28-member EU, said in a statement on its website today.

Policy makers at the Frankfurt-based ECB last week discussed the ground rules for its probes into the health of the 130 banks it will start supervising next year. The check-up is part of the ECB’s demands for assuming the burden of overseeing banks from Deutsche Bank AG to Intesa Sanpaolo SpA, and the first assessment of the industry since a round of stress tests two years ago.

Legally Binding

The EBA proposal would see loans that were more than 90 days late with repayments on more than 20 percent of its outstanding debt classified as non-performing. The agency also clarified rules on forbearance, where banks shift the terms of a loan to account for a change in the debtor’s own income.

The rules come into force at the end of next year and the EBA’s recommendation to the ECB to apply the standards early in its balance sheet review is non-binding.

The point of the asset assessment, as explained by ECB President Mario Draghi earlier this month, is to remove doubts overshadowing Europe’s banking system at a time when he is trying to foster a recovery from a record-long recession.

Investors in European banks expect up to 15 lenders to have to raise as much as 50 billion euros as a consequence of the ECB’s exam, according to a survey of 146 investors by Morgan Stanley.

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