Because some day you might want a detailed breakdown of how Europe’s banks are accounting for their Greek, Spanish — and even Italian — bonds, here’s a helpful table from Deutsche Bank.
It comes from Mohit Kumar and Abhishek Singhania, who’ve crunched the stress test data:
At the European level around 60% of Greek bond are held in the HTM book with the proportion much higher for domestic (Greek) banks compared to non-domestic banks (86% vs. 31%). If we assume that other international banks (not covered by the stress tests) have similar ratio of holdings in the HTM book, it would imply that international banks might not be too averse to a restructuring of Greek debt if it is NPV neutral or limits the NPV loss.
Comparing the holdings of Italy and Spain, we find that a much higher proportion of the Italian bonds held by banks are held in the trading book [AFS]. This could explain the underperformance of Italian bonds in the recent volatile spread widening move as the domestic banks would [not] have been able to increase their purchases. On the contrary, with a larger share of bonds held in the banking books Spanish banks have the ability to withstand mark-tomarket pressure in times of volatile spread widening and hence can offer greater support to their sovereign bonds.
Some background might be helpful here. Bonds in banks’ held-to-maturity (HTM) books aren’t marked to market. Debt held as available for sale (AFS) usually is. The more peripheral debt a bank classifies as HTM the more cushioned it tends to be from volatile market movements, generally.
So if Italian banks were holding large swathes of Italian debt in their AFS portfolios, they would be exposed to recent (violent) market price moves as a rule. Except that the Bank of Italy granted some capital relief for Italian banks holding EU bonds in their AFS books, in the spring of last year.
That gives them some wriggle room, but not much — as Kumar told us:
… it is indeed true that the Bank of Italy had allowed the banks not to recognise mark to market movement in the AFS book for regulatory capital purposes. However, two things are worth mentioning a) The suspension was a temporary measure and if you are a prudential bank then you should ideally still make provision for the losses in the AFS book and b) Regulatory capital impact from the AFS book is impacted by the value of the securities, but is different from loss provisions — even though regulatory capital may not increase, loss provisions still need to be made…
Related links:
Battle of the BTPs and Bonos - FT Alphaville
Greek ‘reprofiling’ and Orwellian accounting - FT Alphaville
Accounting for European stress - FT Alphaville