ECB asks for cut in recognized deferred tax assets

The European Central Bank is calling for changes regarding the recognition of banks’ deferred tax assets, effectively raising the prospect of fresh share capital increases.

Sector sources say that Frankfurt views the level of deferred tax assets acknowledged as part of the banks’ capital as unrealistic and excessive and is asking for a drastic slash.

Following a legislative intervention aimed at strengthening lenders’ capital, they were given the option of including a major share of the deferred tax in their capital assets.

However a large part of domestic banks’ capital (and therefore their all-important capital adequacy levels that the ECB uses to assess banks’ health) currently concerns the tax deferred from loss-making years to profit-making ones, rendering this share of capital purely theoretical.

Therefore the ECB has reopened the issue of deferred tax, according to bank officials, asking for a reduction in the acknowledged amount, which in practice means banks will have to cover the difference by raising fresh capital from the market. However, at the current financial juncture and given the major uncertainty regarding the government’s relationship with its creditors, there is effectively no chance of banks getting the necessary capital from private investors.