Page 27 - EBA 2013.2869 Risk Assesment Report final proof4

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R I S K A S S E S S M E N T O F T H E E U R O P E A N B A N K I N G S Y S T E M
25
Policy implications and possible
measures
While many supervisors have stepped up
efforts to monitor asset quality, a variety of
different national approaches continues to
make it difficult to obtain a clear picture of the
extent of asset quality problems across the
EU in a transparent way. The vast majority
of the RAQ respondents agree or somewhat
agree that policies are in place to govern for-
bearance and to outline triggers/thresholds
if and when loans, which have been subject
to some form of forbearance, may become
subject to credit workout procedures. How-
ever, differing practices across jurisdictions
to address not only asset quality concerns,
but also debt forbearance, continue to cre-
ate uncertainties about the actual level of
credit risk in banks’ balance sheets and the
valuation of bank assets. At EU level there
are differences in loan classifications (e.g.
performing loans, non-performing loans
(NPLs), ‘doubtful’ loans, ‘watch list’). There
are also differences in the way forbear-
ance is defined, assessed, classified and re-
ported. In addition, uncertainties also arise
through accounting practices for loans in
arrears, or the status of restructured loans,
and through different practices of reclassi-
fying performing loans which can substan-
tially distort information on reported NPLs.
The level increase of non-performing loans
would require increasing impairment pro-
visioning, in line with deteriorating asset
quality. In some cases this may pose chal-
lenges to the maintenance of adequate
capital levels. In addition, different nation-
al approaches and banks’ widely differing
practices at an EU level to address asset
quality concerns and debt forbearance cre-
ates significant uncertainties. The doubts
related to banks’ asset quality and forbear-
ance, and the uncertainty on timely recog-
nition of problem loans, loan restructur-
ing, level of impairments, and real estate
market dynamics need to be undoubtedly
addressed in order to rebuild confidence in
banks’ balance sheets. The EBA’s work on
harmonised definitions and data collection
aims to provide the supervisory authorities
with the tools to monitor asset quality devel-
opments in a coordinated fashion and on a
comparable basis across the EU. Therefore,
coordinated supervisory actions would be
crucial to restore market confidence. Con-
sequently, it is extremely important that EU
supervisors conduct comprehensive asset
quality reviews on major EU banks in order
to dispel concerns over asset quality dete-
rioration. Importantly, in order to ensure
transparency and comparability over the
years, appropriate disclosure on the actual
exposures of the EU banking sector is also a
fundamental measure to address concerns
on asset quality.