FRANKFURT (Reuters) -European Central Bank supervisors will zero in on bad loans this year after finding that some euro zone banks had set too little money aside for them or were slow in recognising the problem, the ECB said on Wednesday.Presenting its annual review of the sector, the ECB said euro zone banks generally had more capital than required, and a profit boost from rising interest rates had offset the economic damage from the war in Ukraine.But it warned this may not last.”While rising interest rates are boosting banks’ profitability right now, they may also affect the ability of customers across a number of portfolios and business lines to pay back their debts,” the ECB’s top supervisor Andrea Enria said as he unveiled the results.The ECB has already demanded more capital from 24 banks that “fell short of coverage expectations related to non‑performing loans”, inviting them to close that gap this year.More generally, the ECB found “persisting risk control deficiencies”, particularly in how banks classify loans that are at risk of going unpaid.Earlier on Wednesday, France’s Societe Generale said it had raised its provisions for souring loans in the last quarter, resulting in a 35% decrease in profit from the same period a year earlier.INTERNAL MODELSEnria added supervisors had found some of the models used by banks to quantify risk on their balance sheet were falling short of international rules or the ECB’s own requirements, triggering demands to hold more capital or shed assets.But he cautioned there was no “generalised dissatisfaction” with these so-called internal models, but rather issues with some individual banks.Germany’s Deutsche Bank has delayed a decision on its share buyback because of a possible hit from a review of internal models while Italy’s Intesa Sanpaolo has offloaded assets for the same reason.Enria also emphasised governance as an area where the ECB will take action this year because many bank board members lack the necessary IT experience and independence.Story continues”The absence of a healthy challenge culture and the presence of weak decision-making procedures further hamper effective governance and strategic steering,” Enria said.Overall, the ECB set its own capital requirement, known as Pillar 2, for banks at 1.1% of their risky assets, unchanged from last year.Only one bank was below the ECB’s requirement and its so called capital “guidance”, which is not binding. There were six last year.(Reporting By Francesco Canepa; Editing by Kevin Liffey and Christina Fincher)

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