Bloomberg News

European Watchdog Warns Banks on Need for Consistent Writedowns

September 29, 2011

Sept. 29 (Bloomberg) -- The head of Europe’s markets regulator warned banks to be consistent in their valuations of sovereign debt amid concern some lenders have failed to record sufficient losses on Greek bonds.

Steven Maijoor, chairman of the European Securities and Markets Authority, likened the lack of transparency about banks’ individual holdings of government debt to the subprime mortgages that triggered the credit crisis.

“Lack of transparency regarding exposures to subprime mortgages created a situation of uncertainty about the financial positions of banks,” he said in a speech in Vienna today, according to a transcript released by ESMA on its website. Recently, “a lack of transparency from banks on their exposures to sovereign debt and related instruments are generating new suspicions about the conditions of individual banks and this requires similar answers in terms of transparency.”

His comments follow criticism by the International Accounting Standards Board that banks are failing to write down the value of their Greek government debt to reflect market prices. Lenders’ impairments on Greek government ranged from 6 percent to as much as 51 percent in the second quarter, according to analysts at Citigroup Inc.

“We are currently looking at how banks are applying International Financial Reporting Standards for the valuation of sovereign debt,” Maijoor said. “It is very important for ESMA that financial institutions apply IFRS correctly, and are consistent in their valuations of sovereign debt exposures.”

The Paris-based ESMA coordinates the work of national regulators in the 27-nation European Union. National regulators should force their banks to apply IFRS correctly, he said. ESMA is responsible for ensuring “consistent enforcement” across the European Union, he said.

“This lack of accounting consistency reduces the comparability of banks and insurers’ reported profits and book equity,” Citigroup analysts led by Sarah Deans wrote in their Sept. 8 report to clients.

--Editors: Edward Evans, Steve Bailey.

To contact the reporters on this story: Liam Vaughan in London at lvaughan6@bloomberg.net; Boris Groendahl in Vienna at bgroendahl@bloomberg.net

To contact the editor responsible for this story: Edward Evans at eevans3@bloomberg.net; Angela Cullen at acullen8@bloomberg.net


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