European banks fear new rules

European banks expect new accounting rules due in 2018 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 shows.

European banks expect new accounting rules due in 2018 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 shows.

The new International Financial Reporting Standards (IFRS 9) aim to make banks safer and to avoid a repeat of the 2007-09 crisis by requiring them to put aside 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 struggling to raise capital, which forced Spain’s Banco Popular and two Italian banks out of business in recent weeks.

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

The expected effect on provisions was lower than in the previous survey, which the EBA said might be due to banks’ progress in adapting to the new standards, better economic conditions and a change in the survey’s questions.

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

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