But further regulatory policing will be necessary to assure investors that banks’ assets are being properly valued year in and year out.
“If this is a one-off exercise,” Mr. Papa said, “it is not sufficient to build investor confidence in the transparency of bank reporting.”
The publication last week of the central bank’s test results came ahead of its scheduled takeover of supervisory tasks this month, as part of the single regulator in the region. And in its report, the central bank said the results would be taken into account as it took up the supervisory role. Given the flaws in asset valuation uncovered by the study, the regulator has much work to do. Some banks, for example, were unable to assign proper values to the most basic assets.
Accounting rules have three valuation buckets into which companies can put their assets. They are known as Levels 1, 2 and 3.
Level 1 assets are typically the easiest to value, because they often trade on public exchanges or have otherwise observable prices. Assets assigned to Levels 2 and 3 do not trade regularly and are tougher to value. Assessing these holdings involves making estimates.
Even though Level 1 assets are typically liquid and transparent, the European Central Bank disagreed with how the banks classified 13.5 percent of them in the study. This is a striking failure.
The regulator also said that when reclassifying an asset’s fair value, the banks erred on 10 percent of assets. One-third of the banks sampled did not have a clear policy or process for classifying assets traded in active markets, the report concluded.
A report published in August by the CFA Institute presaged some of the central bank’s findings.
That analysis examined large and complex banks in 16 countries for the 10 years ended in 2013. That included years before and after the financial crisis.
Over that period, Mr. Papa and his colleagues found wide variations in the way banks valued their assets. Yet these institutions’ financial statements contained few details about the factors contributing to the valuation gaps.
Most striking was the difference in how long it took for some institutions to recognize that a loan had become impaired and that setting money aside for a loss was necessary. That banks in different countries took such different approaches to write-offs raises questions about the accuracy of these institutions’ financial statements, Mr. Papa said.
“There was an indication within the E.C.B. report that there would be a follow-up on some of the areas of weakness,” Mr. Papa said. “Clearly, some ground needs to be covered. Investors need a more active role by securities regulators and more robust disclosures.”
