By Huw Jones
LONDON (Reuters) - EU regulators will challenge banks over their failure to properly apply an accounting rule aimed at making sure their provisioning for souring loans is timely and sufficient, the bloc's banking watchdog said on Friday.
The European Banking Authority (EBA) said its second report into how the IFRS 9 rule, which was designed to respond to a central lesson arising from the global financial crisis of 2008, uncovered the same shortcomings as its initial review.
IFRS9 is a global accounting rule that requires loans on a bank's books to be measured against going market prices and recognise a portion of any 'expected' loss over the coming 12 months, and for them to provision for this upfront.
Full provisioning is required if there is a significant increase in credit risk, meaning the loan could default, and failure to properly apply the rule makes it harder for regulators to determine if banks have made sufficient provisioning, and ultimately have the necessary capital levels.
"These analyses have also confirmed the existence of certain practices that raise prudential concerns, as already detected in the last monitoring exercise, within different parts of the IFRS 9 framework that have not been addressed by many institutions yet," EBA said in a statement.
The EBA's findings come at a time when some borrowers are facing difficulties with repayments after interest rates have risen rapidly from record lows, making loans more expensive.
Supervisors in EU states will follow up on the main findings, it said.
The review found a high level of 'adjustments' or 'overlays' - banks using their judgement to tweak results from their risk models - which could delay moving to full provisioning.
"Different practices have been observed in terms of risks consideration, approaches followed for their calibration and level at which these overlays are applied. This may prevent reflecting any additional sources of risk," EBA said.
EBA said Banks were also too reluctant to make so-called "collective" assessment of risks across a portfolio of loans when risk data on individual loans is too sketchy.
This was a "concern from a prudential perspective", it said.
So-called backtesting -- or checks on the accuracy of how IFRS 9 is applied to see if expected loss models need relcalibrating -- also needs improving, it added.