ECB won’t include public debt in bank asset quality review

Public debt holdings will not be classified as risky assets in the examination of the asset quality review of the European banks to be conducted by the European Central Bank (ECB), ECB governing council member Yves Mersch said Monday.

However, Mersch said no decision has yet been taken on the treatment of public debt in the stress tests to which Europe’s banks will also be subjected. The Bundesbank has proposed that in the medium term public debt should not be classified under the risk-free asset heading.

The announcement led to an increase in the share prices of Spain’s banks, which have large portfolios of Spanish government debt.

A group of top officials from Spanish banks is due to meet later Monday with ECB President Mario Draghi to discuss how the stress tests will be carried out. Bank officials from other European countries will attend the meeting as will central bank officials.

The Spanish team includes deputy governor of the Bank of Spain, Fernando Restoy, and the respective chief executive officers of Santander, BBVA and CaixaBank, Javier Marín, Ángel Cano and Juan María Nin. The chairmen of Sabadell and Banco Popular, Josep Olio and Ángel Ron, will also attend the meeting. Nationalized bank Bankia is to be represented by José Sevilla, the general director of the office of the chairman.

The ECB will look at the balance sheets of all banks with assets over 30 billion euros. That means practically the whole of the Spanish financial sector.

Spanish Economy Minister Luis de Guindos said Spanish banks were well prepared for the stress tests to be conducted by the ECB in 2014. Spain borrowed 41.5 billion euros from its European partners to clean up the balance sheets of lenders over-exposed to the ailing real estate sector, a process in which a number of banks were nationalized

“The best thing that has happened to the Spanish financial system is that thanks to transparency and clarity, a lot of doubts have been cleared up,” De Guindos said in an interview with state broadcaster TVE. “No one now has doubts about the exactness and clarity of the accounts of Spain’s banks.”

However, one ongoing problem facing Spain’s banks is growing non-performing loans, which reached record levels in September. According to figures released Monday by the Bank of Spain, the default ratio of the financial system climbed from 12.1 percent of total lending in August to 12.7 percent as the amount of doubtful loans increased by 6.890 billion euros, or 3.7 percent, to 187.830 billion. The ratio stood at 10.7 percent in September of last year. Both the absolute amount and the ratio are at their highest levels since the current historical series was begun in 1962.

The main reason behind the increase is the tighter classification criteria imposed by the Bank of Spain for refinanced and restructured loans. According to a recent report by the central bank, the new rules caused a further 21 billion euros in doubtful loans to surface.