New banking proposal to bypass opposition

Date: 06/03/1997

By Chris Johnstone

Financial Services Commissioner Mario Monti is preparing to sideline UK and Irish protests over the impact of revised rules for covering banks' and investment companies' market risks in order to keep his proposals on a fast track.

Monti wants to push ahead with his plan for a revised Capital Adequacy Directive, the so-called CADII, even though the two countries are warning that special rules for covering risks associated with commodities trading could force firms to close down or move out of Europe to avoid their punitive effects.

Clauses in the new capital adequacy proposal would force companies dealing in any commodity whatsoever to treat it as if it had the high-risk profile of crude oil, a notoriously volatile performer, and cover the trading risks with suitably high provisions.

The UK and Ireland, where most of the EU's commodity dealing investment firms are based, want such companies to be given derogations excluding them from the new rules.

But Monti argues that they have yet to make a coherent case for this and sees no need, at the moment, to alter the proposal. “We will push ahead,” said one official.

Some observers hint at dark Machiavellian motives behind Monti's stand, suggesting it is aimed at giving the Italian Commissioner and current Dutch EU presidency leverage in overcoming separate UK and Irish protests about a revised directive on the solvency ratio for banks and investment companies.

The revised solvency directive poses similar commodity dealing problems for the two countries, together with the added inconvenience for banks that they will have to implement stricter solvency ratios on commercial mortgage-backed securities.

However, Monti's aides deny any linkage and stress the UK and Ireland alone will not be able to block the proposals, which will be decided by ministers by qualified majority vote.

They add that investment companies would be given a competitive advantage if they were excluded from the revised Capital Adequacy Directive and banks were still covered by it.

The European Commission and Dutch presidency are working against the clock to put the new capital adequacy rules into effect by January 1998.

They insist the deadline must be met if EU banks are not to be hampered by tougher capital conditions than their international rivals.

But a spokeswoman for the Brussels-based European Banking Federation said this week that it looked “very unlikely” that the Union would have the accord in place by the end of 1997. “We are hoping that it can be implemented as soon as possible afterwards,” she added

The spokeswoman said most of Europe's main trading rivals were likely to make the changes by that date, and warned: “Failure to implement means that EU banks will have to freeze millions of ecu which could otherwise be working for them.”

The new rules, based on a G10 agreement known as the amendment to capital accord to incorporate market risk, are likely to have a beneficial impact on banks by allowing them to cut their provisions for market risk.

This will be possible because for the first time banks will be able to match closely their capital provisions to their market risks using models tailored to their own trading activities.

Until now, more or less standard capital requirements have been imposed irrespective of a bank's particular trading and risk profile.

For banks, the treatment of commodities is a peripheral issue - or not an issue at all - since such trading is rarely among their core activities.