* Inconsistency makes investors wary of bank stocks
* Big differences in treatment of mortgage arrears,
* Bank of England wants UK banks to justify their approaches
* Standardisation will put some banks in a bad light
By Laura Noonan
LONDON, Dec 17 European banks are under pressure
to standardise how they measure their riskiness as investors
grow increasingly wary of the kaleidoscope of methods used.
The variety of approaches covering critical matters such as
when a loan becomes impaired and defining what is suspect
directly affects how much capital banks must hold and the sort
of returns investors can expect.
Efforts to harmonise reporting standards have been going on
for nearly a decade, but the financial crisis has brought the
issue to a head as investors, burned by tumbling share prices
and emergency cash calls, are steering clear of those lenders
whose risk models they don't trust.
"This lack of comparability does in our view weigh on the
investibility of some banks," said Jon Peace, a London-based
banking analyst with Nomura.
"Where transparency is too low to form a clear view on the
accuracy of the calculations, investors will be inclined to
discount the shares for the uncertainty, whether or not it is
Other analysts, who will only speak anonymously because of
the sensitivity of the topic, are more blunt, with one
describing financial statements as "pointless", given the lack
of consistency across banks and the discretion they have on key
COMPARING APPLES WITH APPLES
The treatment of mortgage arrears is particularly diverse.
As a general rule, home loans are defined as being in
arrears if the repayments are more than 90 days overdue, but it
varies widely across Europe.
In Portugal, a home loan is overdue when just one month's
payment is missed. In Italy, it is one or two months.
At the other end of the spectrum, Denmark's arrears clock
only starts ticking three and a half months after the last
payment was made.
In Italy, IntesaSanpaolo was so concerned that
comparisons with non-Italian banks would lead to "flawed
conclusions" that it incorporated an international comparison
into its last results presentation.
Under the method selected for that presentation, Spanish
banks' bad loans would triple to a quarter of total loans. The
comparable figure for Italian banks was 9.9 percent.
"We see that in an apple-for-apple comparison, the Spanish
figures would triple and would be 2.5 times higher than the
Italian ratio," Chief Executive Enrico Cucchiani said.
"Italian asset quality is significantly underappreciated,
and we also see that there is a clear need for greater
harmonisation and transparency."
'Doubtful' loans are another minefield. Some countries use
payment history as the sole determinant, while others use more
subjective clauses; in Spain and Portugal, for example, a loan
can be classed as doubtful if repayment is considered
One analyst said the quality of banks' disclosure was "just
as problematic" as the different definitions they use; some
banks tell you lots, and some banks tell you very little.
Alain Laurin, a senior vice president at credit rating
agency Moody's, said the agency got good co-operation when it
asked for more information.
Four analysts, who did not work for ratings agencies,
reported a different experience. "Of course we can ask," said
one. "It doesn't mean we get it."
WHO IS RIGHT?
Then there's the issue of capital.
Risk-weighted assets (RWAs), which are a key determinant of
the amount of capital a bank needs to hold, are treated
differently even by banks in the same country, even though all
banks must have their RWA models approved by local regulators.
RWAs are a bank's assets, usually loans, adjusted for the
likelihood of non-payment.
A recent study by the Bank of England recently showed how
some banks can put a low 'weighting' adjustment on a certain
type of loan, meaning there is a strong chance it will be
repaid, while others might assign a far higher weight to the
"Banks in Sweden report RWAs of 5 percent for mortgages, and
banks in Slovakia (apply) RWAs of 50 percent, which is a bit
surprising at first sight," said Moody's Laurin.
"You have to take a view on whether these differences in RWA
are justified or not justified."
A recent IMF study noted that since the financial crisis
broke, some investors have started to interpret high-risk
weightings as a sign banks were being more cautious with their
In a report this month into the "Investibility of UK Banks",
the Association of British Insurers, which represents some of
Britain's biggest investors, cited a lack of confidence in
comparing asset risk as one of the reasons pension funds and
insurers were steering clear of UK bank stocks.
"It's difficult to know who is right, but the fact that
there is a difference means that somebody, almost by definition,
is wrong," said Mike Trippett, a consultant with the ABI.
UK banks may soon see more consistency in their RWA
treatments, however, as the Bank of England and the Financial
Services Authority recently asked them to justify their approach
or change it.
The wider European banking community will also see changes
over the coming years as policymakers, learning from the
mistakes of the financial crisis, move to standardise bank
The European Banking Federation, which represents banking
lobby groups in 31 countries, said it was in favour of the
But Laurin at Moody's warned that for some banks the process
could be distinctly uncomfortable.
"Being transparent is always good for the good banks and bad
for the bad," said Laurin. "Some banks don't want to put certain
information into the public domain because the consequences can