LONDON: Europe's battered banks will find it even harder to avoid realistic writedowns on their Greek debt when they publish third-quarter results next month, as the crisis has worsened since they last updated investors.
European Union regulators have so far failed to impose a common accounting line on banks in the 27-country bloc. At the end of June, some lenders took a 21 percent hit on Greek debt taking their cue from a private sector bailout plan while others reflected the steeper 50 percent market discount.
The third quarter ends on Friday and the discount on Greek debt has since increased to 60 percent on the benchmark 5-year bond.
"The banks need to think about whether something significant has changed since June and now, arguably it has with respect to Greek debt, given the crisis is developing by the day," said Iain Coke, head of the financial services faculty at UK-based accountancy body ICAEW.
"You have market expectation and also analysts will be looking at banks' positions. That will put pressure on banks to put a reasonable writedown in line with market expectations," Coke said.
Accountancy experts say that even the few banks like Britain's RBS that took a 50 percent haircut could have to take a further, albeit smaller writedown.
Pressure on banks that took a much smaller haircut in Q2 will be even greater.
"Greek debt is below the level it was at the end of June. I would expect to see further impairment charges to be taken through the profit and loss account," one auditing professional said.
The focus will be on two French banks Societe Generale and BNP Paribas who both have large exposures to Greek debt and took 21 percent haircuts in the second quarter.
SocGen has said its haircut was now technically equivalent to 35 percent because a chunk of its Greek debt has since matured and was paid back in full.
It has made no comment on the third quarter.
BNP estimated that a 55 percent haircut on its Greek debt holdings could lead to a 1.7 billion euro hit at the pretax level in Q3 , when it tried to reassure investors about its capital position earlier this month.
Much hinges on which accounting category the bonds are held in, with the "available for sale" bucket offering more wiggle room on writedowns.
The International Monetary Fund said in a report this month that 49 percent of loss recognition on sovereign exposures were from this category, where writedowns typically don't impact regulatory capital requirements.
Only 12 percent of sovereign exposures were held in the trading book which requires pricing at the going rate each quarter and writedowns have a direct impact on capital buffers.
EU regulators, responsible for ensuring investors are not confused, discussed the general issue of bank accounting last week in Poland but no fresh attempt to impose a common line has emerged so far.
The European Securities and Markets Authority (ESMA) and accounting standard setter, the International Accounting Standards Board (IASB) have shifted tack, now focusing on end-of-year results, which have to be fully audited.
This puts pressure on the auditors to ask banks why they are not making full writedowns to reflect market values.
ESMA Chairman Steven Maijoor said consistent valuation was more important for annual reports than for interim results.
"From our perspective it is extremely important that this is consistent at the end of the year," Maijoor told reporters in Vienna.
IASB Chairman Hans Hoogervorst told ESMA in a letter last month that some lenders should have booked bigger losses on Greek debt holdings in the second quarter.
Hoogervorst said on Thursday he has no plans for monthly or even annual letters to ESMA, but said it was right to defend IASB rules.
"The good news was that most banks did it right and I am pretty convinced that at the end of the year when the statements are truly audited, they will be right as well, and hopefully everywhere," Hoogervorst said at a conference in Vienna.
Auditing and accountancy professionals say much will hinge on whether ESMA can persuade all regulators by the end of the year to make banks take a realistic hit on debt holdings.
Copyright Reuters, 2011
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