25 November 2011

FT: Banks criticised for treatment of Greek bonds

The European Union markets regulator, ESMA, has criticised the way that some banks and insurers booked relatively small losses on their Greek government debt holdings earlier this year.

The European Securities and Markets Authority argued that some financial institutions had taken an inappropriate approach to valuing these securities in their results for the first half of 2011.

It sided with those companies that had taken haircuts of about 50 per cent on billions of euros of Greek sovereign bonds classified as “available for sale” under accounting rules. At the same time, it disagreed with other financial institutions – including French banks – which had only taken a 21 per cent first-half loss on these bonds after using a so-called “level 3” valuation model instead of depressed market prices.

These banks and insurers had justified the lower write-downs by saying that there was not enough trading in Greek government debt to produce a meaningful market price, commented ESMA, adding that the end result was in line with the terms of a now-superseded Greek bail-out announced in July.

Following criticism of the inconsistent Greek write-downs – including a complaint by Hans Hoogervorst, chairman of the IASB, the accounting rule-maker – ESMA studied the approach taken by 53 companies in their half-year figures.

It conceded that the market for some Greek government bonds had been inactive at the time. However, it said holders of these securities should have considered the market prices of those bonds that had still been trading.

“For some maturities, the markets were not active. However, that still implies that you need to try to use as much as possible the market information and daily pricing from maturities which are very close”, ESMA chair Steven Maijoor said.

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