EU regulators to focus on banks" lending exposures in review European regulators are shaping up to focus on four core areas of banks" lending exposures in their landmark assessment of the health of the sector's balance sheets. The European Central Bank's forthcoming asset quality review will home in primarily on real estate; SME lending; shipping; and "legacy" assets spanning pre-crisis derivative portfolios and leveraged loans, according to bankers briefed on the plan. The focus highlights the concern among regulators and shareholders about the underlying quality of assets on eurozone banks" books, in particular in real estate. That in turn could trigger close scrutiny of lenders in Spain and Ireland where property slumps have been particularly extreme. Although investor sentiment towards Europe, including the continent's banks, has improved markedly in recent months, widespread scepticism remains about the credibility of capital ratios that compare improved equity levels with still questionable asset valuations. The AQR exercise is due to be launched formally in mid-October by ECB president Mario Draghi, prefiguring the central bank's assumption of a new role as the overarching supervisor of the eurozone's biggest lenders in a year's time. Mr Draghi told the European Parliament on Monday that the AQR exercise should "dispel this fog that lies over bank balance sheets." Bankers believe the four core exposures to be covered by the review will capture a significant portion of overall balance sheets, in some cases amounting to three-quarters of total assets. There will be particularly close examination of assets that are categorised as non-performing, substandard and restructured to ensure banks are properly pre-empting likely loan losses. In anticipation, a number of eurozone banks - including Deutsche Bank on Wednesday, Austria's Raiffeisen in recent weeks and the large Italian and Spanish banks last month - have signalled a top-up of reserves to cover loan losses and other charges. Several others, including Spain's Sabadell, Austria's Erste and Monte dei Paschi di Siena in Italy have launched capital raisings. Many banks have yet to be told anything about the AQR process, though some have received informal briefings via their national regulators. Bankers generally say they are supportive of both the ECB's new single supervisory powers and the AQR, as important devices to signal a resurgent eurozone. "The AQR is the most important thing the eurozone has to do," Frédéric Oudéa, chief executive of France's Société Générale, told the Financial Times in a recent interview. However, given the mystery around the exercise to date, some remain concerned about the parameters of the exercise. "We hope it will be a fair exercise," said Karl Sevelda, chief executive of Austria's Raiffeisen, which has a wide range of eastern European operations. "It would not be right to have a kind of " malus" treatment for central and eastern Europe exposures." The probe is likely to shine a light on inconsistencies between banks in assigning risk weights to different assets - already a subject that is being scrutinised by regulators in Europe and globally. If the AQR moved to apply minimum levels to weightings, analysts believe it would crystallise large capital shortfalls at more aggressive banks. Analysts at Morgan Stanley highlighted "the fine line policy makers need to tread in order to make the test rigorous enough to be credible, but not so stressful that the sovereign/bank vicious cycle resumes."