European banks 'may have inflated balance sheets over Greek debt'

Some banks are using models instead of market values to mark down Greek assets, says the International Accounting Standards Board. Photograph: Stephan Hoeck/Getty Images/Stock4B Creative

The International Accounting Standards Board has said European banks may have inflated their balance sheets and profit and loss accounts by not taking full writedowns on distressed Greek debt.

In a highly unusual intervention, the IASB on Tuesday published a letter from chairman Hans Hoogervorst to the European Securities and Markets Authority saying that some banks were using models to mark down the value of Greek assets, where market valuations existed.

When accounting for trading assets, banks are required under International Accounting Standard 39 to use arm's-length values taken from actual transaction prices to value the assets on their books. Where trading is very illiquid and market valuations cannot be obtained, they can then use valuation models using internal estimates of value.

"There have been indications in the market that some European companies are applying the accounting requirements for fair value measurement and impairment losses in a way that seems to differ from the objective of [accounting standards]. This is evident particularly in their accounting for distressed sovereign debt, including Greek government bonds. Those indications have now been confirmed by recently published financial reports, which show inconsistent application across Europe. This is a matter of great concern to us," Hoogervorst said in the letter.

The letter does not name the banks concerned, but the Financial Times said it related to the accounting of BNP Paribas and CNP Assurances. Both took 21% writedowns on Greek debt, much smaller than the hits suffered by other banks, including RBS, which took a 51% writedown.

"It appears that some companies are not following IAS 39 when determining whether the Greek government bonds are impaired. They are using the assessed impact on the present value of future cash flows arising from the proposed restructure of those bonds, rather than using the amount reflected by current market prices as required," the IASB letter said.

The IASB pointed out that trading in Greek debt was continuing and therefore any values thrown up by those transactions should be used by banks to determine impairments.

"A company cannot ignore relevant market data (including observable transaction prices) when it is clear that market participants would use that data in determining the price at which they would be willing to enter into a transaction for the financial asset."

The writedowns being taken do not reflect market prices as a result, Hoogervorst said. "It is hard to imagine that there are buyers willing to buy those bonds at the prices indicated by the valuation models being used."

A BNP spokeswoman told Reuters: "BNP took provisions against itsGreece exposure in full agreement with its auditors and the relevant authorities, in accordance with the plan decided upon by the European Union on 21 July."

CNP declined to comment.

The IASB is responsible for setting accounting standards but not for enforcing them.