EU banks underrate loan risks – Moody’s

Published Jan 25, 2013

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Laura Noonan London

BANKS in Spain, Italy, Ireland and Britain needed to set aside much more money to cover potentially bad loans, Moody’s Investors Service said yesterday, meaning European taxpayers may again be tapped for cash.

European banks have already raised hundreds of billions of euros to cover possible losses from loans that soured in property and financial market crises. Much of the funding has come from governments.

“We believe that many banks, in particular in Spain, Italy, Ireland, and the UK, require material amounts of additional provisions to fully clean up their balance sheets,” Moody’s said in its global banking outlook for 2013.

“Some banks have in recent years delayed full recognition of embedded loan losses, partly by restructuring loans,” the report added. “This strategy of buying time (often tolerated by regulators) limits a bank’s capacity for new lending and poses risks for creditors of European banks.”

Moody’s did not say how much extra money banks would need.

Rival agency Fitch warned yesterday that British banks could be underestimating the riskiness of their property loans and might need more capital to correct this.

Moody’s believes 2013 will be a volatile year for Europe’s banks, but expects their credit ratings to remain stable after a raft of downgrades in 2012.

The agency’s outlook for US banks is negative due to a challenging home market, while its outlooks for Asia-Pacific, emerging Europe and Latin America are stable.

Fitch’s view on UK banks’ assessment of risk chimes with comments from the Bank of England in November last year.

The central bank said that Britain’s four biggest banks – HSBC, Barclays, Royal Bank of Scotland and Lloyds – could be overstating their capital levels by between £5 billion (R70.6bn) and £35bn because of the way they measured risk.

Britain’s Financial Services Authority is reviewing how banks weight the riskiness of their loan books and lenders will be told by March if they need to beef up their capital reserves to protect against loans going sour. The results are not expected to be made public.

From the end of 2007 to the end of June 2012, the banks’ risk weighted assets nearly halved to 35 percent from 65 percent despite their loan books staying relatively stable.

A study of banks with a higher exposure to residential mortgages revealed an even sharper fall in their perceived risk, despite a weaker property market, Fitch said. – Reuters

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