* ECB conducts Asset Quality Review for 130 banks
* Eurozone banks cannot be forced to accept AQR values
* National regulators could treat AQR results differently
* Extra capital charges could be used for AQR results
By Laura Noonan
LONDON, Jan 27 The euro zone's grand plan to
clean up its banks could falter because the European Central
Bank lacks the power to force bankers, constrained by accounting
rules, to accept regulators' view of the risks on their books.
The plan aims to give the ECB a 'clean sheet' when it takes
over regulation of the euro zone's lenders in November and also
to restore investor confidence in the banks which are still
valued below their U.S. peers more than five years on from the
financial crisis. 
The ECB is assessing if banks in the 18-country euro zone
have enough capital to support their business.
Its Asset Quality Review (AQR) of 130 of the euro zone's
largest banks' books is already under way ahead of stress tests
later in the year. The AQR checks whether banks are currently
adequately capitalised, while the stress tests look at whether
they can survive a future crisis. Estimates of the banks' total
capital shortfall have been as high as $1 trillion.
But accountants, bankers and regulators said the AQR could
stumble on legal and accounting issues beyond the scope of the
Banks have a legal responsibility to value their own assets
in accordance with international accounting rules and cannot
simply plug the ECB's valuations into their balance sheets.
"The ECB is powerful, but it cannot undo a hundred years of
company law," one supervisory source said, speaking on the
condition on anonymity since these matters are sensitive.
Banks will still need enough capital to cover the loan-book
risks identified by the ECB but the AQR's aim of increasing
transparency and investor confidence might fall by the wayside.
A DIFFICULT AREA
The debate is already being played out in Ireland, where
Bank of Ireland said it disagreed with some of the
values produced by its central bank's Balance Sheet Assessment
exercise in late 2013. In Slovenia, a senior bank executive said
his bank would not change its end-2014 balance sheets to reflect
the findings of an asset review.
"It's clearly a sensitive area, apart from Spain we haven't
really seen banking regulators get involved in the accounting
process across Europe," Tony Clifford, partner in financial
services at accountancy firm Ernst & Young, said. In pre-crisis
Spain, regulators tried to get banks to set aside extra
provisions on top those required by accounting rules.
"Banking regulators are likely to have different appetites
for pushing these numbers into the accounts," Clifford added.
The accounting rules - International Financial Reporting
Standards (IFRS) - which 90 percent of the ECB's banks report
under, have a guiding principle that provisions can only be
taken for losses actually incurred, and not for expected losses.
Clifford said the main challenge was whether national or
European regulators would require banks to make greater
provisions than the accounting rules allow.
DETAILS 'UNDER CONSIDERATION'
Another accountancy source said the ECB had indicated it did
not want national regulators to push for banks to reflect AQR
results in their next financial statements because the concept
was too problematic. The ECB declined to comment.
In a letter to European Member of Parliament Sharon Bowles
on January 10, ECB president Mario Draghi said the findings from
the comprehensive assessment (which includes the AQR) should be
carried forward into 2014 results statements. "Precise details
in this respect remain under consideration," Draghi added.
A second European supervisor said a capital rule known as
Pillar II would allow regulators to force banks to hold enough
capital for risky loans even if they are not reflected in banks'
The ECB and European Banking Authority (EBA) have said the
stress tests and AQR results will be released together, but have
not said in how much detail.
James Longsdon, co-head of EMEA banks research at ratings
agency Fitch, said the AQR had the potential to be hugely
illuminating of banks' assets values but would be less helpful
if detailed results are not published.
Some regulators may favour greater disclosure if it flatters
them or their banks. "National regulators have got their pride
on the line," said Bridget Gandy, who co-heads Fitch's EMEA
banking team with Longsdon. "None of the regulators are going to
want to risk the appearance of having been asleep on the job."
The AQR timeframe - which spans almost a year - could also
create turbulence for investors. Several finance experts said
banks could be required to let the markets know as soon as they
get a sense of how their ECB assessment is going.
Consultants involved in earlier bank stress tests said such
information is typically held back from banks for as long as
possible, so that they are not put in that position.
"The risk of leaks through the process is also not
inconsiderable, given the scale of the exercise and the number
of institutions involved," Draghi said in his letter, adding
that the ECB will take measures to preserve confidentiality.