LDN - Business

European banks expect hit from new accounting rules: EBA

[July 13, 2017] By Francesco Canepa

FRANKFURT (Reuters) - European banks expect new accounting rules due to kick in next year to eat into their capital and push up the amount of money they must set aside against bad loans by nearly a fifth, a survey by the EU's banking watchdog showed on Thursday.

A man is seen in front of a sheet of five Euro notes at the opening of the new Central Bank of Ireland offices in Dublin, Ireland April 24, 2017. REUTERS/Clodagh Kilcoyne

The new International Financial Reporting Standards (IFRS 9) aim to make banks safer and avoid a repeat of the 2007-09 crisis by requiring them to put aside some money for loan losses much sooner than at present.

But these rules may add to the woes of banks that have high levels of soured credit and are already struggling to raise capital, which forced Spain's Banco Popular <POP.MC> and two regional Italian banks out of business in recent weeks.

Two-thirds of banks surveyed by the European Banking Authority said they expected their provisions to go up by up to 18 percent as a result. The average respondent envisaged a 13 percent increase.

The expected impact on provisions was lower than in the previous edition of the survey, which the EBA said may be due to progress made by banks in adapting to the new standards, better economic conditions and a change in the survey's question.

"Banks have made further progress on the implementation of IFRS 9 since the previous exercise, but smaller banks are still lagging behind," EBA said.

It warned, in particular, that banks had scaled back plans to carry out parallel runs, where they apply the old and new accounting rules at the same time.

The lenders surveyed also expected the new standards to force them to recognize losses on existing loans that, while not defaulted, are at an increasing risk of not being repaid.

This would shave up to 75 basis points off their own funds, as measured by its Common Equity Tier 1 ratio, for the vast majority of respondents and 45 basis points on average, the survey showed, with smaller banks faring worse.

The new rules are due to kick in on Jan. 1, 2018 but heavy pushback by the banking lobby, particularly in Italy, meant European lawmakers were now considering a phase-in period over three years.

Fitch Ratings said earlier this year it saw Irish, Spanish and Italian banks as the most vulnerable among those that use internal ratings for credit.

(Reporting By Francesco Canepa; Editing by Toby Chopra)


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