REFILE-EBA push on price marks threatens capital hikes
(This story first appeared in the October 12 edition of IFR, a Thomson Reuters publication - www.ifre.com/)
LONDON, Oct 14 (IFR) - Proposals from the European Banking Authority to clamp down on the way banks value illiquid assets on their books could force some banks into making writedowns, and leave some thinly capitalised firms facing the prospect of fresh capital increases.
The EBA is currently weighing up whether to push proposals into European legislation after an industry-wide consultation that ended last Tuesday. Under the prudent valuation adjustment proposals, assets that cannot be valued with a 90% confidence level will attract a greater haircut, meaning banks will have to set aside more capital against them than had previously been the case.
Bankers complain that the proposals, which have attracted little attention outside the industry until now, are in conflict with international accounting standards, namely International Financing Reporting Standards which allow banks to place fair values on assets if an auditor can be convinced the pricing is correct.
"PVA is a clear reflection of the tension between IFRS and bank regulators," said the chief financial officer at one of Europe's biggest banks.
"The accounting rules clearly stress the need for fair value and that's what you have to reflect in your accounts and what everyone signs off. The EBA suddenly says it wants a 'prudent price', which is something completely different. It's a totally different form of accounting."
Regulators are keen to clean up bank balance sheets, amid suspicions that some are not valuing their assets correctly. During the financial crisis and the years following it, banks were criticised by regulators for being overly optimistic about the values of assets on their balance sheets, thereby falsely inflating their capital strength.
One senior fixed-income banker admitted that regulators were considering the new rules because they were worried that banks had been able to pull the wool over the eyes of their auditors when it came to providing accurate pricing marks.
But bankers say the proposals create further complications. "Right now we have regulators, central banks and accounting rules all pushing us in different directions," said the CFO. "It is all completely incoherent and the concern is that there will be unintended consequences."
The EBA has been pushing on the issue for some time. In November 2012, it released a discussion paper with proposals on the methodology for calculating PVA that were widely panned by the financial industry. One of the cornerstones of the rules was a 95% confidence level. In response, the regulator put out a moderately watered-down discussion paper in July this year, this time asking for a 90% confidence level.
Regardless of the change, bankers say far more flexibility is needed. They argue that it would be too stringent to adopt a singular approach to value all assets, particular those as diverse as derivatives.
"It's difficult to say which assets would most likely be affected, although the higher the uncertainty in terms of asset valuation, the higher the impact," an EBA official told IFR. "Therefore, the impact will depend on whether banks are already taking these adjustments into account in their valuations."
According to auditors, UK regulators have had rules on 90% valuation confidence levels in place for several years. However, before the financial crisis these were loosely applied and it is only more recently that the rules have been more strictly enforced. Auditors say they are not aware of similar rules being in place in other European jurisdictions, meaning that UK banks could be in better shape to handle the proposals than their continental rivals.
It is unclear how badly banks in other countries will be affected, but bankers are convinced that the EBA proposals will have far-reaching implications and have dismissed any notion that this is a small, technical change.
For its part, the EBA does not appear swayed. Having already given the financial industry some leeway on the issue, it is not convinced that banks need the rules to be delayed or eased. It is convinced that loose valuation rules were a main component of bank weakness during the financial and eurozone crises and that more accurate marks are a critical element to ensuring banks are strong enough to survive another potential crisis.
The EBA will present its recommendations to the European Commission for a vote. It aims to submit them by June 2014, although there could be a lengthy wait before a vote is held, with some analysts estimating it could be as late as mid-2015. This will give banks more time to push their case for less stringent rules but there is not expected to be much political support for their position. (Reporting by Spencer Anderson; editing by Matthew Davies)
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