March 3, 2021

High & Low Finance: European Banks Apply Slippery Standards on Greek Bond Valuations

That is the important issue being sorted out now in Europe, where banks have taken widely divergent positions on valuations of Greek bonds.

Broadly speaking, there seems to be a consensus within countries. British banks were most willing to swallow bad medicine and admit the bonds were worth far less than par value. Some German banks were equally forthcoming, but others were less so. Italian banks seem to have done as little as they could, but did take write-downs. French banks went the farthest to find ways to act as if Greek bonds were just fine.

The first-half financial statements issued by the banks were unaudited, but they were reviewed by audit firms. The same firms — well, firms with the same name — seem to have signed off on wildly different ways of looking at the same underlying market for Greek bonds. In some cases there is enough disclosure for investors to try to adjust valuations, but in other cases there is not.

The situation is so chaotic that the chairman of the International Accounting Standards Board, Hans Hoogervoorst, wrote to European securities regulators in early August to protest that “it appears that some companies are not following” the relevant accounting rule, known as IAS 39. He did not name names, but there was no doubt he had the French banks in mind.

The protest — which was kept secret until someone leaked it to The Financial Times — has so far provoked no public response from the regulators.

It is the French securities regulator, the Autorité des Marchés Financiers, whose reaction will matter most. If it forces French banks to change their accounting, it risks incurring the wrath of both the French government and French bank regulators. If it looks the other way and other European securities regulators do nothing, the essential weakness of international standards — a lack of consistent enforcement — will be clear to all.

That the fight is taking place now may be critical to the future of the international rules. The Securities and Exchange Commission is weighing whether to allow American companies to use the international rules rather than the ones set down by the American rule writer, the Financial Accounting Standards Board. The S.E.C. would be able to enforce consistent application of the rules by companies whose securities trade in the United States, but arguments for the change would be undermined if it appeared there was little reason to think those reports would be comparable to reports issued by companies in other countries.

It has long been clear there is no common legal enforcement mechanism for international rules, but some hoped the audit firms would fill that role. In this very visible area, that did not happen.

“Auditors have not enforced a consistent approach among their clients,” wrote Peter Elwin, the head of European accounting research for J. P. Morgan. “Some institutions have taken full advantage of the principles-based IAS 39 impairment rules to achieve the desired result.”

In an interview, Mr. Elwin said that could change. “Interim results are not audited, whereas the year-end figures will be,” he said. “That may tighten things up.”

Or it may not. Although they use similar names in various countries, the auditing firms are organized as national partnerships. There are efforts within the firms to assure consistency across borders, but in the end it is the French partnership — which is no doubt quite aware of what the French government wants — that decides what it will allow French companies to do.

Mr. Hoogervoorst is upset by the way banks are accounting for Greek bonds that they have carried on their books as “available for sale.” Under IAS 39, such bonds are supposed to be marked to market values. But such write-downs do not have to be shown in net income unless and until the bond values are deemed to be impaired.

During the financial crisis in 2008 and 2009, banks could and did argue that there was no active market for some of the strange derivatives that they owned. If that were the case, then they were supposed to look to market values of similar instruments. Only if those were not available were they allowed to go to “mark to model.” If they can use models, they can apply assumptions about expected cash flows and determine current value from those calculations.

Floyd Norris comments on finance and the economy at

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