Monday December 22, 2014 Search
Weather | Athens
13o C
8o C
News
Business
Comment
Life
Sports
Community
Survival Guide
Greek Edition
EU tax-asset moves bolster banks while sustaining sovereign link

By Jim Brunsden

Governments across struggling southern Europe are allowing banks to shore up their capital with tax credits, even though this runs counter to the European Union’s drive to disentangle the finances of lenders and states.

Portugal last month joined Italy and Spain in permitting the conversion of some deferred tax assets into credits that banks can count toward the capital they’re required to have on hand. When a company overpays taxes in one period, it can book a deferred tax asset that reduces its liability in the future. Greece is considering a similar move. All but Italy received bailouts during the debt crisis that included aid for banks.

The rule changes are a boon to banks as they try to satisfy tougher post-crisis capital requirements and pass this year’s health check conducted by the European Central Bank and the European Banking Authority. At the same time, the credits give banks a claim on the public purse, strengthening the vicious circle that fueled the euro-area crisis.

“For some countries, providing their banks with some help to meet their regulatory requirements takes precedence over a fuller separation of the fortunes of their banks from the public finances,” said Richard Reid, a research fellow for finance and regulation at the University of Dundee in Scotland. “The treatment of DTAs probably falls into this camp.”

ECB oversight

Euro-area governments in 2012 embarked on a concerted bid to break the link between banks and sovereigns by centralizing supervision and crisis management of lenders. This push enters a new phase on Nov. 4, when the ECB assumes oversight of euro-zone banks after releasing the results of its balance-sheet exam in late October.

Deferred tax assets arise when a bank books losses or credits that it expects to be able to use to reduce its future tax obligations. This can happen for reasons including a carry- forward of unused tax losses and temporary differences in how profits are recorded for tax and accounting purposes.

These assets accounted for about 10 percent, or 105 billion euros ($138 billion), of the core Tier 1 capital of banks assessed in a July 2011 stress tests, though some lenders’ levels are far higher, according to EBA data.

The deferred tax assets in regulators’ crosshairs are those that banks can only make use of when they are profitable. Since profitability is never guaranteed, regulators stipulated that they aren’t reliable enough to count toward more than 10 percent of a bank’s core capital requirements. These rules laid down by the Basel Committee on Banking Supervision and the EU come gradually into force in the next five years.

Conversion rights

In Portugal, the government permitted companies to convert deferred tax assets into tax credits when they report losses. To qualify for this option, companies must issue conversion rights that will give the state the right to become a shareholder or sell those rights in the market, Finance Minister Maria Luis Albuquerque said in June.

Spain passed rules last year that allowed the country’s banks to keep counting 30 billion euros of deferred tax assets as capital under the latest international rules, known as Basel III. The large amount held by Spain’s banks mostly stems from losses booked in 2012 as the government forced them to clean up their real estate assets.

“Under Basel II, these DTAs were capital of the highest quality, but under Basel III that’s not the case,” Economy Minister Luis de Guindos said at the time. “If we hadn’t made this change to company tax, Spanish banks would have been at a disadvantage to their competitors.”

‘Positive impact’

Discussions in Greece on making the rule change are gaining momentum, Harris Kokologiannis, chief financial officer at Greece’s Eurobank Ergasias SA, said on Aug. 29.

“We hope that this will materialize at the end,” he said. “And if it happens, we will have a dual positive impact for the stress test as well as for the fully loaded Basel III.”

Patricia Jackson, head of prudential advisory at accounting firm EY in London, said that while this practice is “in line with EU and global capital standards, the problem is it potentially increases government expenditure and certainly government exposure.”

“In order for the tax credits to still qualify as core capital, nations are giving banks a clearer, direct claim on the government,” she said.

This claim doesn’t necessarily violate EU regulations on state support for companies, which are intended to promote fair competition, according to the European Commission.

“DTA reforms do not necessarily involve state aid,” said Antoine Colombani, a spokesman for Joaquin Almunia, the EU’s competition policy chief.

“There might be state aid involved only when the reforms provide selective advantages to certain undertakings or sectors of the economy which cannot be justified by the intrinsic logic of the tax system and which cannot be declared compatible under the EU state aid rules,” he said. [Bloomberg]

 

ekathimerini.com , Thursday September 4, 2014 (10:54)  
Greek current account deficit shrinks in October
Energy shares and Greek rebound lift European equities
Draghi starts squaring QE circle in month of persuasion for ECB
Euro shaky on ECB and Greece, dollar keeps edge
Parliament to investigate Haikalis claim he invested in stock market
The parliamentary committee responsible for monitoring MPs derivation of wealth declarations (pothen esches) is due to meet in the next few days to scrutinize claims by Independent Greeks M...
Tuesday morning stoppage on metro, electric railway and tram in Athens
There will be no service on the Athens metro and electric railway (ISAP) before 8 a.m. on Tuesday due to a protest by employees. The tram will not be available before 7 a.m. either, as worke...
Inside News
SOCCER
Special day for Abidal, lucky one for PAOK
PAOK scraped through its Livadia challenge beating Levadiakos to remain on top of the Super League for Christmas, one point ahead of Olympiakos that enjoyed a great game at Kalloni and offer...
BASKETBALL
Explosive Barca unfazed by Panathinaikos, bomb scare
Panathinaikos lost 80-67 at home to Barcelona on Friday in a rather meaningless game at the end of the first group stage of the Euroleague, but the encounter will be remembered for the bomb ...
Inside Sports
INTERVIEW
Klaus Regling stresses debt sustainability through commitment to reforms
BRUSSELS The man who is responsible for the loans to Greece as managing director of the European Stability Mechanism (ESM/EFSF), Klaus Regling, is the only high-ranking European official w...
INTERVIEW
Crisis of confidence will come back again and again, says Thomas Piketty
Hes treated like a rock star wherever he goes to lecture. His book Capital in the 21st Century, a study on income and wealth inequality from the 18th century to the present, recently tran...
Inside Comment
SPONSORED LINK: FinanzNachrichten.de
SPONSORED LINK: BestPrice.gr
RECENT NEWS
1. Parliament to investigate Haikalis claim he invested in stock market
2. Tuesday morning stoppage on metro, electric railway and tram in Athens
3. Greek current account deficit shrinks in October
4. Energy shares and Greek rebound lift European equities
5. Parliaments ethics committee to look into independent MPs comments
6. Prosecutor gathers depositions in Independent Greeks bribe probe
more news
Today
This Week
1. Government accuses SYRIZA and Independent Greeks of 'clear alliance'
2. Euro shaky on ECB and Greece, dollar keeps edge
3. Prosecutor gathers depositions in Independent Greeks 'bribe' probe
4. Draghi starts squaring QE circle in month of persuasion for ECB
5. Parliament's ethics committee to look into independent MPs' comments
6. Energy shares and Greek rebound lift European equities
Today
This Week
1. Samaras summons bond vigilantes with euro exit talk
2. High stakes
3. Europe's drama in Greece needs final act to avoid tragedy
4. A friendly yet firm message from Pierre Moscovici
5. On the edge but not gutless
6. Girl, aged 11, gives birth on Crete
Find us ...
... on
Twitter
... on Facebook
About us  |  Subscriptions  |  Advertising  |  Contact us  |  Athens Plus  |  RSS  |   
Copyright 2014, H KAΘHMEPINH All Rights Reserved.