By Laura Noonan
DUBLIN, March 10 (Reuters) - The European Central Bank’s stance on how bad loans are defined will be one of the biggest revelations in an announcement on Tuesday on how it will test the balance sheets of the euro zone’s largest banks, three sources with knowledge of the tests told Reuters.
The details will give the 128 banks being tested their most explicit insight to date on how their books will be examined by inspectors deciding whether they need billions of euros of extra capital.
The tests are being done to restore investor confidence and clean up any lingering problems in the euro zone’s banks before the ECB becomes their supervisor in November.
The methods some euro zone banks use to decide if a loan has turned sour will fall short of those in the ECB’s review of banks’ loan books, a source with knowledge of the matter said.
The rules will require that new valuations must be done for any collateral that had not been valued within a year of January 2014, two of the sources said, and will also set the banks estimates of loan losses against ‘challenger models’ created by external auditors.
The ECB declined to comment.