In a comprehensive assessment of 130 banks, consisting of an asset review (AQR) and a stress test, it was found that some banks had been ‘explicitly non-compliant’ with accounting practices, with some 8% of the total provision increase reported as deriving from a misalignment with accounting standards.
Have any sanctions been applied to those banks that were violating accounting standards?
The ECB’s comprehensive assessment consisted of an asset quality review (AQR) and a stress test (ST). Under the AQR, accounting practices were reviewed and the outcome of this work was used for the ST. The final capital requirements therefore included adjustments to compensate for any inaccurate accounting values as identified by auditors and supervisors according to the definitions (i.e. non-performing exposures) used in this exercise. These definitions relied substantially on European Banking Authority (EBA) Recommendations.
However, the comprehensive assessment was not an accounting enforcement exercise but a supervisory exercise. Indeed, the prudential supervisory response to the AQR and ST findings for individual banks in the Banking Union countries is the responsibility of the Single Supervisory Mechanism.
Finally, the European Securities and Markets Authority (ESMA) and national supervisors are responsible for ensuring the proper application of EU-endorsed International Financial Reporting Standards (IFRS) by listed companies, including banks. It is for those authorities to see that proper asset values are used in listed banks’ IFRS financial statements.