The European Central Bank has flagged concerns that banks could take advantage of the transition to new accounting rules to mask their losses for 2017, Bloomberg News reported March 26, citing "three people familiar with the matter."

The ECB's Single Supervisory Mechanism, or SSM, has alerted auditors earlier in 2018 that the transition to the new International Financial Reporting Standards, known as IFRS 9, could enable banks to spread out provisions for loan losses over a five-year period instead of reflecting an immediate hit in their 2017 financial results, the sources said.

The SSM is also said to have alerted the European Banking Authority of its concerns. In its discussions with the EBA over the matter, the SSM's board reportedly agreed that it could introduce additional capital charges on banks found to have reported unjustified capital savings, another source told Bloomberg.

Under IFRS 9, which took effect Jan. 1, banks are required to set aside capital to cover expected loan losses, and EU legislators have allowed a five-year period during which banks can phase-in the impact of those increased provisions.

In its annual supervision report published March 26, the ECB said it found shortcomings of more than €10 billion in banks' loan books and that there is a need for banks to set aside more provisions.