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ZURICH/LONDON (Reuters) - European Union banks would have more breathing space from losses on Greek bonds if the bloc adopted a new international accounting rule, a top standard setter said on Tuesday.
The International Accounting Standards Board (IASB) agreed under intense pressure during the financial crisis to soften a rule that requires banks to price traded assets at fair value or the going market rate.
This led to huge writedowns, sparking fire sales to plug holes in regulatory capital.
The new IFRS 9 rule would allow banks to price assets at cost if they are being held over time.
The European Commission has yet to sign off on the new rule for it to be effective in the 27-nation bloc, saying it wants to see remaining parts of the rule finalized first.
"There are many people in the Commission who think we should adopt it quickly because it gives us a little bit more leeway in terms of Greek government bonds," IASB Chairman Hans Hoogervorst told a conference in Zurich.
As the EU works on a second bailout for Greece, markets still largely expect the country will default on its bonds in some form, which will have implications for banks in the EU that hold Greek bonds, chief among them French and German banks.
"Right now most of them are held as available for sale. If you impair them, you have to impair them at the going market rate," Hoogervorst said in his first speech as the IASB's new chairman.
"If they are at amortized cost, such as IFRS9 would make possible, then you still have the possibility of making some sort of judgment.
"This crisis shows IFRS 9 is indeed a better standard, and I am absolutely convinced the EU will in the end endorse it," Hoogervorst said, who took up the reins at the IASB last Friday.
The European Securities and Markets Authority (ESMA), an EU watchdog, said it would scrutinize "accounting implications" of plans to solve the euro zone's sovereign debt crisis to ensure investors have a clear picture.
Ratings downgrades might trigger more impairment losses for banks. ESMA Chairman Steven Maijoor told the conference it was important these were treated consistently by banks.
"While I understand the reluctance to take losses, we should realize there are very large amounts of troubled sovereign debt in the books of banks at pre-crisis values," Maijoor said.
Under existing IASB rules, if there is no formal default, banks decide if losses are being incurred due to any changes in terms such as the rollover being considered for Greek debt.
IFRS 9, which does not look at loan losses, has been introduced in some parts of the world and Hoogervorst dismissed claims it would increase volatility in financial earnings.
"Overall, the impact of fair value has been reduced to some extent. The current IAS 39 standard in Europe leads to more volatility than IFRS 9," Hoogervorst said.
IASB rules are used in more than 100 countries, with major economies such as China and Japan moving toward adoption.
The U.S. Securities and Exchange Commission has said it will announce this year whether to adopt IASB's standards which are being "converged" with American reporting rules by the end of 2011 to lure the world's biggest capital market on board.
But some in Congress are worried about loss of regulatory sovereignty in allowing a London-based body to set accounting rules in the United States, but Hoogervorst is optimistic.
"It's really hard to fathom the possibility that they would want to relinquish their leadership role in international accounting," Hoogervorst told Reuters on the sidelines of the conference.
"A negative decision is almost impossible to think about. It's fine if they take their time as long as we have a clear decision," he said. He expects the U.S. to introduce an endorsement process for new IFRS rules as the EU has.
As the new chairman, Hoogervorst is keen to push ahead to a "post-convergence" agenda, after years of intense meetings between the IASB and its U.S. counterpart FASB has created a backlog of work on updating some core principles.
Hoogervorst will launch a public consultation shortly on what "needs fixing" and more possible rule changes, such as in the areas of foreign exchange and agriculture.
But the ESMA's Maijoor said that "post-2011, the IASB should strive for a period of calm in accounting standards."
The IASB is under pressure from regulators to play a more active role in aiding financial stability, in the teeth of opposition from accountants who say accounting rules are simply aimed at providing a snapshot of a company's health.
After agreeing to the changes on fair value and forcing banks to anticipate losses earlier in their accounts, Hoogervorst hinted to regulators he is now drawing a red line.
"The main contribution of accounting standards to stability is by providing transparency," said Hoogervorst, himself a former top Dutch regulator and finance minister.
Reporting by Silke Koltrowitz, writing by Huw Jones; Editing by Will Waterman and David Hulmes