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ECB to simplify European bad loan definition

Euro sign outside the European Central Bank, Frankfurt, Germany
Image Source | Image Source | Getty Images
Euro sign outside the European Central Bank, Frankfurt, Germany

The ECB is set to allow the euro zone's top banks to meet less stringent definitions for bad loans than previously planned when it makes an unprecedented review of lenders' balance sheets this year.

The 128 lenders under scrutiny by the European Central Bank were allowed to apply the softer "simplified definitions" for bad loans in their first data submissions for the asset quality review (AQR).

Two sources with knowledge of the matter said the banks, which will come under ECB supervision later in 2014, will be able to use the easier definitions for the rest of the assessment too.

An ECB spokeswoman said the issue was still being discussed and a decision was expected soon.

Some at the ECB had hoped to apply the full definitions rolled out by the European Banking Authority (EBA) in October, for assessing when loans go bad and the impact of restructured loans. However, many banks cannot adapt to the new guidelines in time for the review.

The compromise takes some shine off the ECB's exercise, which is meant to show investors that euro zone banks have cleaned up their balance sheets after years of crisis and are now fit to support economic recovery.

Even so, applying a minimum standard is still more rigorous than using national definitions, which make it hard to draw up cross-border comparisons and raise the risk that banks could hide problems behind domestic obscurities.

The EBA defines a loan as non-performing when a repayment is more than 90 days overdue or when repayment is unlikely. A second rule defines when forbearance on a loan has taken place, meaning the bank has allowed the borrower to skip or reduce payments. The rules will become binding at the end of the year.

A simpler version of them would mean skipping certain criteria for the time being, such as accounting for the wider impact once a company defaults on a loan.

The ECB will publish more details of the AQR and the EBA's stress test at the end of January or early February.


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