ECB Seeking to Unmask Weak Banks Wants Risky Loan Details

The European Central Bank asked Europe’s biggest lenders to disclose loans on their balance sheets that are at risk of default as part of its review of the health of the region’s financial system.

Banks also had to provide figures on loans they have restructured for clients, a document distributed to 128 banks taking part in an asset quality review and obtained by Bloomberg showed. The document, in the form of an excel spreadsheet, asked banks to note how many of their loans classified as “performing” have already been restructured, and how many loans that don’t yet meet the standard definition of non-performing -- 90 days past due -- are “unlikely to pay.”

The information may give the ECB, which takes over supervision of the euro-region’s banks in November, a clearer view of diverging national practices in defining bad loans and allow for better comparison across the euro area. The deadline for submission was Dec. 31, two people said on the condition of anonymity because the schedule isn’t public. An ECB spokeswoman declined to comment on the contents of the document.

“One of the key elements to credibility is the homogenization of methods of assessing bad loans and restructured loans,” said Karim Bertoni, an analyst at de Pury Pictet Turrettini & Cie. in Geneva. “Failing the test for some banks will mean adding capital and dilution for current shareholders, but new strength and credibility afterward.”

Loan Arrears

The ECB is scrutinizing lenders’ assets as authorities seek to prevent a replay of the taxpayer-funded bailouts that followed the collapse of Lehman Brothers Holdings Inc. in 2008. Deutsche Bank AG, Intesa Sanpaolo SpA of Italy and Bank of Ireland are among firms that increased provisions for bad loans or raised capital before the ECB review. Lenders including Italy’s Banca Monte dei Paschi di Siena SpA have announced plans to raise capital.

Banks had to provide details of which performing loans are in arrears by less than 30 days and by between 31 days and 90 days, and which non-performing loans are in arrears by less than 90 days while being judged unlikely to be repaid, according to the ECB document. While such information isn’t usually reported by banks in their earnings statements, the ECB requested it to ascertain whether the past-due loans present a possible threat to banks’ financial health.

The banks also had to reveal loans that are already non-performing and overdue between 90 days and 180 days, 180 days and 360 days and by more than a year, the document showed.

Market Interest

“The detail on loans already subject to restructuring is something the market would like to see,” said Jonathan Tyce, senior banks analyst at Bloomberg Industries in London. “Both at a company and industry level, understanding how much discretion has been applied should be reflected in coverage ratios and a higher-level view of relative asset quality.”

Banco Popolare SC, Italy’s fourth-largest bank, said last week it will sell as much 1.5 billion euros ($2 billion) of stock after it announced bad loans in the fourth quarter of about 1 billion euros. The company said the unexpected loan losses resulted from the European Banking Authority’s definitions given in October for “non-performing and forborne exposures.”

The ECB requested that banks provide loan data as of June 2013, the document showed. Banks received a separate request for data on their trading books earlier this month that will be based on unaudited figures for the end of 2013. A deadline for submission to national regulators is Jan. 31, the people said.

Risky Portfolios

Information on banks’ trading books will guide the ECB on the selection of the “riskiest” portfolios and models for the review, the central bank said in the document.

The ECB’s assessment will give investors greater faith in claims that European banks are healthier because one regulator will check the books systematically, Brussels-based research firm Bruegel said in a January report.

The central bank has also asked lenders to provide a breakdown of revolving credit in the form of credit cards and overdrafts, as well as which mortgaged properties bring income for borrowers, the documents showed.

Lenders were asked by the ECB to provide details of their commercial lending into categories for project finance, shipping, aviation, state-owned enterprises, real estate, large corporates and larger small and medium-sized enterprises, according to the document.