LONDON: Eurozone banks face penalties if they miss deadlines set by the European Central Bank in its landmark review of lenders’ balance sheets, national supervisors were told at a Frankfurt meeting, according to sources familiar with the talks.

The ECB’s asset quality review (AQR) is part of a wide-ranging examination of 128 of the region’s largest banks to address lingering doubts about their health and avoid nasty surprises once it starts supervising them from November. The exercise aims to encourage banks to recognise losses on loans or investments that have gone bad, allowing them to regain investors’ trust and freeing up capacity to grant new loans to help the Eurozone’s fragile economic recovery.

Several hundred experts from national supervisors across the 18 Eurozone countries and professional firms advising them gathered at the ECB’s Frankfurt headquarters on Monday for an all-day session spelling out the road ahead for the bank tests.

“Deadlines are sacrosanct,” said one source familiar with the meeting. If banks cannot fill out the complex templates of information on time, testers will use “conservative proxies” to make an educated guess about the state of their books, the source added.

The treatment would likely penalise banks because the conservative estimates of factors influencing an asset’s value would likely lead to a lower value than the reality.

More conservative assumptions would ultimately make a bank’s position look worse, and force weaker lenders to raise more capital than they would otherwise have to.

Confidence in the sector remains fragile despite more than 1 trillion euros ($1.4 trillion) of state support since the financial crisis and the Eurozone’s debt problems underlined the risky relationship between over-indebted governments and the banks who buy many of their sovereign bonds. The overall deadline for the bank checks is October, so results are known when the ECB becomes the region’s supervisor. There are other deadlines along the way, but those can vary.—Reuters