Accounting That's Based on Politics

By Norris, Floyd | International New York Times, March 14, 2014 | Go to article overview

Accounting That's Based on Politics


Norris, Floyd, International New York Times


Among European accounting regulators, there seems to be no hesitation to accept numbers chosen by politicians.

What is an asset worth? How much capital does a bank really have?

Since the financial crisis showed that banks in many countries had reported capital levels that turned out to be wildly optimistic, investor cynicism has grown, and with it fears that a really stringent evaluation of a bank's books could produce disastrous results.

Nowhere is that truer than in Italy, where in the past national regulators have sometimes seemed to be more like cheerleaders than stern judges. A 2010 stress test of major European banks, which found they were generally in good shape, was widely derided because it assumed that there was no risk in government bonds -- the very asset that was then arousing the most concern among investors.

Passing a test widely viewed as rigged does not add much to a bank's credibility.

This week brought some really bad news from UniCredit, the largest Italian bank, as it reported a loss of 15 billion euros -- about $21 billion -- in the final quarter of last year. In normal times, such an announcement would most likely bring a selloff in bank stocks. But this one did the opposite. Shares rose, with UniCredit rising to a two-year high.

In buying shares, investors were in effect saying that they found the UniCredit numbers credible and that they were not nearly as bad as had been feared.

And because the announcement was widely assumed to be an attempt to get out in front of the European Central Bank, which later this year will give opinions on the status of all large European banks, it represented evidence that investors trust that review is being done well. Results of it are expected in October, before the E.C.B. takes over regulation of the major banks in November.

The Asset Quality Review, and a stress test to determine how well each bank would do in a specified crisis, are being conducted by the E.C.B. in conjunction with local central banks. In a fractious Europe, the evidence so far is that the process is going well.

"By and large, talking to E.C.B. staffers and reading the documents, I think the E.C.B. is conducting a competent process," said Jacob F. Kirkegaard, an economist with the Peterson Institute for International Economics.

He noted that Italy was the only one of the troubled peripheral countries in the euro zone whose banks had not been carefully vetted by European institutions in connection with a possible aid plan.

But if the E.C.B. is coming out looking good, the UniCredit report was evidence of just how disconnected -- and in some ways political -- the world of European accounting has become.

UniCredit, which went on an ill-conceived acquisition binge in Central Europe in the years before the credit crisis, wrote off EUR 9.3 billion in goodwill and customer relationships -- essentially an admission that it overpaid. And it more than quadrupled its provision for loan losses, raising the figure by EUR 7.2 billion, to EUR 9.3 billion.

But even though the bank's net worth on its published financial statements fell by 24 percent, bank capital is computed differently. …

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