March 26, 2018 / 1:02 PM / a year ago

ECB inspectors find 10 bln euro problem in banks' loan book

FRANKFURT, March 26 (Reuters) - European Central Bank inspectors found shortcomings and miscalculations worth more than 10 billion euros when going through euro zone banks’ loan books last year, the ECB said on Monday.

The ECB’s annual report on its work as the euro zone’s top banking watchdog shows some banks were found to be deficient in the way they identify problem customers and loans, set aside provisions and choose when to grant credit, among other areas.

Tasked with avoiding a new financial crisis, the ECB is putting pressure on banks to clean up their balance sheets from unpaid loans inherited from the last recession, a problem for most countries in the south of Europe, as well as Slovenia and Ireland.

These, along with risky derivative instruments, will remain the focus of ECB supervisors this year, President Mario Draghi said in the report.

“In 2018 banks continue to face some key challenges,” Draghi said.

“These include cleaning up their balance sheets, reducing legacy exposures largely originating from the financial crisis, such as certain non-marketable financial products, and from the ensuing Great Recession, such as non-performing loans.”

The report shows the ECB’s focus has been mostly on the latter - a cause of griping among Italian banks, which have been complaining that risks associated with derivatives held by their competitors in France and Germany have been overlooked.

The ECB launched 156 inspections in 2017, around 60 of which concentrated on bank credit - in most cases including soured loans.

By comparison, market risk, which includes derivatives, accounted for fewer than 10 inspections.

These revealed that some banks were failing to classify their derivatives correctly according to how difficult they are to value, and therefore potentially risky.

Insufficient board action and inadequate internal audits were also among the issues spotted by ECB inspectors in this area. (Reporting By Francesco Canepa Editing by Gareth Jones)

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