Banks criticized over level of Greek writedowns
By Lionel Laurent and Rosalba O'Brien
PARIS/LONDON (Reuters) - Some European financial institutions should have booked bigger losses on their Greek government bond holdings in recent results announcements, the International Accounting Standards Board (IASB) said in a letter to the EU market regulator.
The criticism comes as Europe's 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 (ESMA), the IASB -- the rule setter aiming to become the global benchmark for financial reporting -- criticized inconsistency 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 IASB disagreed.
"Although the level of trading activity in Greek government bonds has decreased, transactions are still taking place," IASB Chairman Hans Hoogervorst wrote.
ESMA was not immediately available for comment.
The letter, which was posted on the IASB's website on Tuesday after being leaked to the press, did not single out particular countries or banks.
According to an unnamed source cited by the Financial Times, however, the move did reflect specific concerns over the approach taken by France's biggest listed bank BNP Paribas and insurer CNP Assurances -- both of which used their own valuation models rather than market prices.
A BNP spokeswoman said: "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 CNP spokeswoman said the group's Greek debt provisions had been calculated in accordance with the EU plan and in agreement with its auditors.
Some investors see the issue as serious, even if the STOXX Europe 600 bank index was trading higher on Tuesday.
Citing recent comments by International Monetary Fund chief Christine Lagarde that called for the mandatory recapitalization of European banks, Chahine added: "I agree with Christine Lagarde.
"European banks need to be recapitalized ... It's clear their balance sheets are extremely fragile."
CONFIDENCE HIT
European banks taking a 3 billion euro ($4.2 billion) hit on their Greek bond holdings earlier this month employed markedly different approaches to valuing the debt.
The writedowns disclosed by the banks in their 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 cut-off period for second-quarter results just posted.
The IASB 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 IASB standards, that its rules are consistent and properly represent what's 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 pan-EU auditor regulator, either standalone or within ESMA.
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 euros in potential writedowns, according to Citi analysts.
BNP would take the biggest hit with 2.1 billion euros in remaining writedowns, followed by Belgium's Dexia with 1.9 billion and Germany's Commerzbank 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.
(Reporting by Rosalba O'Brien, Huw Jones and Sinead Cruise in London and Lionel Laurent in Paris; Editing by Jon Loades-Carter)