Banks trim risk but fail to raise provisions ahead of EU review

Sun Dec 8, 2013 4:39am EST
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By Laura Noonan

LONDON (Reuters) - Most of Europe's big banks shed risky assets in the quarter to September, but they have yet to take extra provisions against doubtful loans to show they have put the financial crisis behind them in time for a critical review by regulators.

After reckless lending brought several banks and some governments to their knees during the global crisis, which is still playing itself out in a number of euro zone countries, next year's Asset Quality Review (AQR) by the European Central Bank will judge whether the banks have done enough to recognize and provide for losses on their loan books as of December 31.

The results feed into EU-wide stress tests that assess whether banks need to raise more capital to insulate themselves against future economic and financial shocks.

A Reuters analysis of the third-quarter results of Europe's 30 largest banks found that almost two thirds of the 27 that report detailed quarterly figures said their balance sheets were less risky at the end of September than at the end of June.

Cutting risk means they need less capital.

Assets such as unsecured personal loans, distressed commercial loans and certain derivatives carry a higher risk weighting, while government bonds are unweighted.

Swiss bank UBS cut 9 billion Swiss francs ($10 billion) of risk-weighted assets (RWA) in the quarter by exiting derivatives positions, while Spain's Bankia traded risky real estate assets with national "bad bank" Sareb for 19.5 billion euros ($26.6 billion) of government-guaranteed bonds.

But almost two thirds of the banks took lower charges for loan losses in the third quarter than a year earlier, and the 'coverage ratio' - what they set aside for losses relative to their stock of impaired loans - rose only marginally.   Continued...

An illuminated euro sign is seen in front of the headquarters of the European Central Bank (ECB) in the late evening in Frankfurt January 8, 2013. REUTERS/Kai Pfaffenbach