Banks to face €61.5bn hit from new accounting rules, says report
Harriet Agnew and Laura Noonan
New accounting rules could force Europe’s top banks to recognise an extra €61.5bn in loan losses, new analysis shows, as a major UK pensions group has warned that bank accounting is not fit for purpose.
Analysts at Barclays have calculated how 27 of Europe’s biggest banks would fare under new global rules governing how much lenders should set aside for potential bad loans.
In a report published on Tuesday, they found that the rules would trigger an increase of about 34 per cent in loan loss provisions across the group, as well as lower bank valuations and more volatile earnings.
The report came as the UK’s Local Authority Pension Fund Forum reignited a long-running row over the new rules on financial instruments, dubbed IFRS 9, describing them as “fundamentally flawed”.
The LAPFF published an opinion from George Bompas QC, claiming that the new regime would still not give a “true and fair” view of banks’ financial position. It wants the EU to refuse to endorse the standards.
The rules on financial instruments are a culmination of a seven-year project to make company accounts paint a more accurate picture. They came in response to concerns about how banks were dealing with impairments during the financial crisis.
Banks were unable to book accounting losses until they were incurred, even though they could see the losses coming. At times the incurred loss rule meant banks overstated profits upfront and did not make prudent provisions against expected losses, particularly in areas such as loans secured against property.
Under IFRS 9, which is due to come into force in 2019, banks will move from an “incurred loss” to an “expected loss” model, where they are forced to set aside money for the expected losses on all loans, and lifetime losses on riskier ones.
In its research, Barclays said the new requirement to recognise expected losses on all loans at initiation would add about €13.4bn to the banks’ loan loss provisions. Another about €48bn would be added because of additional provisions for lifetime losses on bad loans.
The hit to capital comes as banks are already facing higher capital demands from a string of new rules.
Spain’s Caixa, Italy’s UBI and the UK’s Standard Chartered are the most affected by the change in the IFRS 9 rules. Caixa’s common equity tier one ratio would fall by about 1.7 per cent as a result of the higher loan losses triggered by the rules, Barclays said, while Standard Chartered’s and UBI’s would fall by about 3 per cent.
Banks that would see the slightest impact include Credit Suisse, UBS, Virgin Money and Nordea.
The rules will have a broader impact than the immediate financial hit. “Using ‘expected loss’ may lead banks to overestimate losses during severe downturns, increasing earnings volatility,” the note said. “This may lead to higher CET1 (capital) ratios over time.”
While the rules do not come into force until 2018, Barclays said some banks with excess capital might “soften the one-off impact” by taking higher provisions in 2016 and 2017.
NGO: German firms mired in worst Greek corruption scandals since WWII
EurActiv.com with AFP
31 Aug 2015 – 14:09 updated: 16:15
Siemens, Daimler, and Rheinmetall have been mired in cases of alleged corruption in Greece, the country that Berlin has repeatedly admonished for the parlous state of its economy.
No date has been set yet for 19 former executives of German engineering group Siemens to appear in Greek court, but it is expected to be one of the biggest financial trials of the decade in Greece.
More than 60 people in total are being investigated for corruption in the case that US watchdog CorpWatch has labelled "the greatest corporate scandal in Greece's postwar history."
Bavaria-based Siemens, whose links to Greece go back to the 19th century, is suspected of having greased the palms of various officials to clinch one of the country's most lucrative contracts — the vast upgrade of the Greek telephone network in the late 1990s.
Overall, Siemens allegedly spent 70 million euros on bribes in Greece, according to Greek judicial sources.
The investigation is now in its ninth year with a case brief over 2,300 pages long.
Contacted by AFP, a Siemens spokesman at company headquarters in Munich said: "We don't comment on that case."
Among those suspected of corruption is the group's former point man in Greece, Michalis Christoforakos.
>>Read: Greece scores worse than Bulgaria in corruption ranking
But the 62-year-old, who holds dual Greek and German citizenship and at the height of his influence rubbed elbows with the ensemble of Greece's political elite, is unlikely to face trial.
Christoforakos fled Greece for Germany in 2009, and German justice has refused to extradite him, arguing that the statute of limitations covering his alleged activities has lapsed.
Relations between Athens and Berlin — already tested by the Greek economic crisis and Germany's insistence on painful austerity to bail out the debt-wracked country — have not been helped by the Siemens case.
Earlier this year, Greece's combative parliament speaker Zoe Constantopoulou said the affair smacked of double standards on the part of Berlin.
"This is a question of justice that shows there is doublespeak by Germany," she told France's Liberation in a recent interview.
"German companies have notoriously engaged in corrupt practices in Greece but such cases are only occasionally investigated," the German Foreign Policy think-tank said in a recent report.
According to Transparency International and its 2014 corruption perception index, Greece's public sector was regarded as one of the most corrupt in the European Union.
In 2011, at the height of the Greek economic crisis, a parliamentary inquiry estimated the damage to public coffers at two billion euros from inflated contract costs ultimately borne by taxpayers.
Lucrative military deals
Arms procurement has been another lucrative field for German companies, with Greece for years spending the most money proportionately on defence – 2.2 percent of gross domestic product (GDP) in 2014 — among EU members, Sahra Wangenknecht, a lawmaker of Germany's leftist party Die Linke, told AFP.
"German companies have reaped considerable profit from Greece's colossal arms purchases," Wangenknecht said.
For automaker Daimler, Greek justice opened an investigation earlier this year on suspicion of bribery in the award of an 100-million-euro military vehicle contract.
>>Read: Germany's Schäuble says ministers to discuss Greek credit line
Krauss Maffei Wegmann, the makers of the German Leopard tank, was also placed under investigation in Munich.
Meanwhile, fellow defence contractor Rheinmetall in 2012 was fined 37 million euros by a court in Bremen, Germany, over a bribery case involving the sale of its anti-aircraft defence system for 150 million euros.
And two former managers at industrial services provider Ferrostaal were also convicted in Munich of shady payments to clinch a Greek submarine order, with the company fined 140 million euros.
But observers note that the fines are usually nowhere near the value of the government contracts in question, effectively rendering them useless as a deterrent.
