European banks need to increase their provisions for bad shipping loans by 25%, to EUR 7.3 billion (USD 9.25bn), according to the European Central Bank’s (ECB) year-long examination of the resilience and positions of the 130 largest banks in the Euro area as of 31 December 2013.
In the report the ECB said that it ”placed particular emphasis on the treatment of shipping exposure across the SSM (Single Supervisory Mechanism) given the divergent practices observed across banks and NCAs (national competent authorities).”
The ECB found that ”following the credit file review, a total of 21.3% of the shipping debtors reviewed were reclassified to non-performing, and the total amount of provisions increased from €5.9 billion to €7.3 billion (+25%). The countries with high levels of exposure to the sector are Germany, Italy, the Netherlands and Greece.”
German banks have to increase their provisions from EUR 4.1bn to EUR 5.2bn, Dutch banks from EUR 0.5bn to EUR 0.6bn, Greek banks from EUR 0.9bn to EUR 1.1bn, while Italian banks can keep their provisions unchanged at EUR 300 million.
”During the AQR (Asset Quality Review) quality assurance, the ECB became concerned about the high sensitivity of certain German banks’ CET1 ratios to long term cash flow assumptions used for provisioning of shipping loans.
This sensitivity was due to particularly large amounts of non-performing shipping exposures valued under the going concern approach, where provisions were derived from discounted values of projected cash flows (in accordance with IFRS rules and the AQR methodology).
With a view to the elevated level of uncertainty on the medium and long term development of the shipping markets, the ECB raised doubts on the reliability of these cash flow projections for the purposes of the AQR.
After consultation with the NCA, the ECB imposed prudential buffers on the present values of projected cash flows used for calculating provisions on shipping portfolios of German banks. These prudential buffers were applied solely for the purpose of the AQR and do not constitute a judgment on the use of projected cash flows for accounting purposes,” the ECB said in their aggregate report on the comprehensive assessment.
World Maritime News Staff; Image: European Parliament