Bloomberg News

ESMA Tells Banks to Value Sovereign Writedowns Consistently

November 29, 2011

(Adds French bank writedowns in 11th paragraph. For more on the debt crisis, see EXT4.)

Nov. 25 (Bloomberg) -- The European Securities and Markets Authority told banks to value their sovereign debt holdings consistently or risk causing financial markets to malfunction.

A fact-finding mission carried out by the authority on how some banks’ had valued Greek bonds in their half-yearly statements had shown that accounting practices at financial institutions were “varied,” ESMA said, including for “the extent of debt exposures subject to impairment losses.”

“The consistent application” of international accounting rules “is important for the proper functioning of financial markets,” ESMA said in an e-mailed statement today.

The Greek government is in negotiations with the Institute of International Finance, which represents more than 450 financial firms, on the details of an agreement to write down the country’s bonds by 50 percent, in an attempt to save the country’s economy from collapse. The debt swap may take place next month, the IIF has said.

Banks should also provide “quantitative and qualitative information” on their holdings of credit-default swaps on sovereign debt, ESMA said. This should include the “estimated level of protection” that the bank has from losses because of the swaps.

Investors buy CDS as insurance to protect themselves from losses if a bond issuer defaults.

European Banks

The International Accounting Standards Board warned in August that some European banks hadn’t sufficiently written down their holdings of “distressed sovereign debt.”

ESMA compared how 53 financial institutions had valued Greek bonds in their half-yearly statement’s ending June 30, 2011, the authority said.

Only 10 out of the 23 banks that planned to hold Greek bonds to maturity had written down the value of the securities in line with discussions at the time between EU governments and the IIF, ESMA said.

“There was objective evidence” by June 30 that Greece may not fully repay its debts, ESMA said, including because of the “significant financial difficulty of the debtor.” The impact of this “could be reliably estimated” and banks should have taken it into account in their reports, ESMA said.

Dexia SA, BNP Paribas SA and Societe Generale SA have resisted pressure from regulators to accept more losses on their holdings of Greek government debt amid criticism they haven’t written down the bonds sufficiently.

While most banks have marked their Hellenic debt to market prices, a decline of as much as 51 percent, France’s two biggest lenders and Belgium’s largest cut the value of some holdings by 21 percent. The three would have about 3 billion euros ($4 billion) of extra losses if they took writedowns of 50 percent, data compiled by Bloomberg in October showed.

--With assistance from Ben Moshinsky in London. Editor: Jones Hayden, Anthony Aarons

To contact the reporter on this story: Jim Brunsden in Brussels at jbrunsden@bloomberg.net

To contact the editor responsible for this story: Anthony Aarons at aaarons@bloomberg.net


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