Accounting Board Criticizes European Banks on Greek Debt

By REUTERS Published: August 30, 2011

PARIS Some European financial institutions should have booked bigger losses on their Greek government bond holdings in recent results announcements, the International Accounting Standards Board said in a letter to market regulators. The criticism comes as Europes lenders face calls to shore up their balance sheets and restore confidence to investors unnerved by the euro zone debt crisis, funding market jitters and a slowing economy. In a letter addressed to the European Securities and Markets Authority, the I.A.S.B. which aims to become the global benchmark for financial reporting criticized inconsistencies in the way banks and insurers wrote down the value of their Greek sovereign debt in second-quarter earnings. It said some companies were not using market prices to calculate the fair value of their Greek bond holdings, relying instead on internal models. While some claimed this was because the market for Greek debt had become illiquid, the I.A.S.B. disagreed. Although the level of trading activity in Greek government bonds has decreased, transactions are still taking place, the board chairman Hans Hoogervorst wrote. The E.S.M.A. was not immediately available for comment. The letter, which was posted on the I.A.S.B.s website Tuesday after being leaked to the press, did not single out particular countries or banks. European banks taking a 3 billion, or $4.2 billion, hit on their Greek bond holdings earlier this month employed markedly different approaches to valuing the debt. The writedowns disclosed in their quarterly results varied from 21 to 50 percent, showing a wide range of views on what they expect to get back from their holdings.

A 21 percent hit refers to the haircut on banking sector involvement in a planned second bailout of Greece now being finalized. A 50 percent loss represented the discount markets were expecting at the end of June, the cutoff period for second-quarter results. Two French financial companies, the bank BNP Paribas and insurer CNP Assurances, on Tuesday defended their decision to use their own valuation models rather than market prices. BNP took provisions against its Greece exposure in full agreement with its auditors and the relevant authorities, in accordance with the plan decided upon by the European Union on July 21, a bank spokeswoman said. A CNP spokeswoman said the groups Greek debt provisions had been calculated in accordance with the E.U. plan and in agreement with its auditors. Some investors see the issue as serious, however, even if the STOXX Europe 600 bank index was trading higher on Tuesday. The Greek debt issue has been treated very lightly, said Jacques Chahine, head of Luxembourg-based J. Chahine Capital, which manages 320 billion in assets. And its not just Greek debt all of it needs to be written down, Spain, Italy. The E.S.M.A. was unable to impose a uniform Greek haircut across the E.U. and its guidance published at the end of July simply stressed the need for banks to tell investors clearly how they reflect Greek debt values. The I.A.S.B. also has no powers of enforcement in how banks book impairments but is keen to show the United States, which decides this year whether to adopt I.A.S.B. standards, that its rules are consistent and properly represent whats happening in markets. Auditors warned at the time against a patchwork approach that will confuse investors and concerns over Greek haircut reporting will fuel calls for a panEurope auditor regulator. The impact is more likely to be to further reduce investors confidence in buying bank debt, rather than sovereign debt, said Tamara Burnell, head of financial institutions/sovereign research at M&G. Using the most aggressive markdown approach namely marking to market all Greek sovereign holdings would saddle 19 of the most exposed European

banks with another 6.6 billion in potential writedowns, according to Citi analysts. BNP would take the biggest hit with 2.1 billion in remaining writedowns, followed by Dexia in Belgium with 1.9 billion and Commerzbank in Germany with 959 million, Citi said. The European Commission said on Monday that there was no need to recapitalize the banks over and above what had been agreed after a recent annual stress test .
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