LONDON Dec 20 European Union regulators told banks to shed more light on how much it is costing them to give cash-strapped customers more time to pay back loans as the weak economy bites.
Thursday's intervention from the European Securities and Markets Authority follows other regulatory efforts to ensure banks set aside enough capital to cover soured loans.
The fear is banks are dragging their feet over admitting some loans won't be paid back in full or at all, which would force them to acknowledge losses and possibly need more capital.
A fuller picture is also seen as key to luring investors back to a tarnished sector that took another pounding on Wednesday with UBS's $1.5 billion fine for rigging the widely used Libor market benchmark.
ESMA's chairman Steven Maijoor said there was a lack of clarity in statements put out by banks on their accounting treatment of forbearance, or giving customers more time to pay back a loan rather than writing it off.
"We have seen the impact of an inadequate approach to forbearance and impairment in previous financial crises and our aim is to avoid a similar situation developing here in the EU," Maijoor said in a statement.
"A uniformly consistent approach on this issue in the EU will contribute to the proper functioning of financial markets, the maintenance of financial stability in the European Union and improved investor protection."
Maijoor said forbearance was "objective evidence of impairment" under EU accounting rules, meaning a financial hit must be assessed.
Banks must apply a "heightened level of scepticism" in calculating the impact of souring loans like mortgages and not simply base their figures on what the customer is contractually obliged to pay, he added.
ESMA will see if further, unspecified action is required.
The intervention comes as banks prepare annual statements which must be signed off by an outside accounting firm. Those statements will have to detail forbearance practices and how forborne assets are being accounted for.
The European Banking Authority and the European Systemic Risk Board are also studying forbearance as regulators note a low level of defaults on loans despite the sluggish economy and high unemployment in some countries, indicating that banks may be increasing the number of loans on which they grant customers more time.
The Bank of England said in its Financial Stability Report last month that proper provisioning from banks could help their recovery.
The market value of many banks has fallen to below what their assets are worth and the Bank said perceptions of widespread forbearance may have contributed to investor doubts about the true value of a bank's assets.
Top banks say their capital levels already meet or even exceed what tougher capital rules will require over coming years but regulators are less convinced.
The BoE said UK lenders should bolster their capital defences because many have underestimated the cost of loans going sour and fines from mis-selling and other scandals.