Bad-debt classification practices across Europe show "material differences that, if not considered, would severely affect the consistency and credibility of the exercise," according to a European Central Bank document obtained by Bloomberg News.
The ECB is concerned that those national differences could adversely impact its probe into the health of euro-area banks.
The Frankfurt-based ECB is conducting a multi-stage assessment of banking assets before it assumes oversight of an estimated 130 lenders across the 18-member euro area in November. Using a strict definition of bad debt could threaten banks in countries hit hardest by Europe's debt crisis, while a laxer rule may not reveal the true condition of the regions financial system.
The ECB document said not all countries may be able to comply with simplified definitions of non-performing loans mapped out in October by the London-based European Banking Authority, the EUs top bank regulator, while saying that alignment to those rules is critical. The EBA sets financial standards for the 28 nations in the European Union.
The ECB indicated it would apply EBAs simplified definition as a minimum, and when possible raise the level of detail for loans made by banks. The minimum means the ECB would define as non-performing all exposures -including loans, debt securities, financial guarantees and other commitments - that are past due for more than 90 days.
That differs from final, more complex, standards, set to be implemented by EBA by the end of 2014, that include data on the likelihood of the borrower repaying. Only half of the countries examined could supply that data, according to the ECB report, while limiting the definition to the 90-day rule seems possible for the majority of countries.
Euro-area lenders such as Banco Santander SA in Spain and Alpha Bank SA in Greece will come under ECB supervision next year, with oversight forming the first pillar of a banking union designed to mitigate future financial turmoil. ECB policy makers have said the central bank will offer more information on the treatment of non-performing loans and the parameters of the concluding stress test by the end of January.