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EU to investigate deferred tax assets treatment

08/04/2015 16:50
The EU is considering a probe on the fairness of the state guarantee provided for the use of deferred tax assets as part of regulatory capital, the Financial Times report.

According to the report, Greece will also be part of this procedure which could investigate whether states are illegally underwriting banks that have bolstered their capital with assets considered low quality in the rest of the Eurozone as well as by the ECB.

The probe will focus on four Southern European countries, Italy, Spain, Portugal and Greece but it could prove especially important for Greece due to the high participation of deferred tax assets in the banks' core capital as according to the article they represent 30%-40% of the total.

Overall, the four countries hold more than €40bn in deferred tax assets as core capital in their banking systems, according to ECB data published last October.

Deferred tax assets are created when banks make losses that they can later offset against their tax bill. Under the Basel III rules on bank capital, such assets will progressively no longer count as bona fide capital. But the four southern European states have classified them so that they do still count.

A full probe by Brussels into the legality of the way that governments guarantee these assets would pose a severe challenge for southern European banking systems that are still struggling to recover from the eurozone crisis.

Any withdrawal of government support for deferred tax assets could dramatically weaken some banks’ capital buffers, raising the possibility of another shock to Europe’s banks.

The European Commission is currently studying information requested from member states to establish whether the case merits a formal investigation. People familiar with the process said a “conversation” was now under way between member states and competition authorities in Brussels.

The case has come into the sights of competition authorities in Brussels because they investigate arrangements that they suspect are illegal “state aid”. In this case, the question of unfair state support arises because Madrid, Lisbon, Rome and Athens would have to back up the capital composed of tax credits if the banks were to collapse.

To compensate for the perceived weakness of deferred tax assets, the ECB has signaled that it would increase capital buffers, called Pillar 2 requirements, on banks seen as over-reliant on this kind of capital. The commission’s powers can be stronger, however. Declaring state guarantees illegal would have serious negative impact on the value of capital.

According to Reuters an EU executive said that EU contacted authorities in Spain, Italy, Portugal and Greece following requests from some lawmakers in the European Parliament and other stakeholders on state guarantees.

"The Commission has received first responses and is currently assessing them. To be clear, the process is at a very early stage. We cannot prejudge whether a formal investigation is needed or the outcome of the Commission's assessment of these measures," the EU regulator said.

The Basil III agreement allows for a gradual subtraction of deferred tax assets from capital adequacy calculations starting from 40% and reaching 100% in 2018 when the Basil III directive must be fully implemented.

The deferred tax asset for Bank of Cyprus as at December 31, 2014 amounted to €457 mn.

According to a BOCY official the bank used a 40% deduction for calculating the recently announced core tier 1 capital adequacy ratio of 14% while the full implementation of the Basil III requirements would have reduced this ratio to 13,6%.

For Hellenic Bank deferred tax assets stood at €52 mn.