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
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
The Bank of England said in its Financial Stability Report
last month that proper provisioning from banks could help their
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.