Europe’s banks fight move to put new restrictions on loans

Date: 06/05/1999

By Renée Cordes

EUROPEAN banks are resisting US attempts to ensure banks set aside extra capital against loans to take account of their perceived risk, fearing that it may give their American rivals an unfair advantage.

US Federal Reserve chairman Alan Greenspan and Bill McDonough, president of the Federal Reserve Bank of New York, are leading calls for a revision of the 1988 Basle Accord, which is designed to make banks safer by specifying supplementary capital requirements for internationally active institutions.

Under the accord, banks are required to earmark a certain amount of capital to cover loans, depending on who the borrower is. They do not, for example, have to make any capital provision for government bonds issued by members of the Organisation for Economic Development and Cooperation (OECD) but must allocate 1.6% of capital for loans to OECD banks.

For other loans, such as mortgages, banks have to set aside up to 8% of capital, though some countries allow them to earmark only 4%.

EU banks believe that the current rules are sufficiently watertight, but US officials have been campaigning since last summer for them to be tightened further, arguing that they do not fully reflect the potential risks of the investments.

They have suggested allocating credit according to a bank's own internal model and taking into account a bank's rating by agencies such as Standard & Poor's and Moody's.

European banks are fighting tooth and nail against this, arguing that it would take many financial institutions in the EU years to develop complex internal models similar to those used by American banks. Many also fear that they would have to set aside even more than 8% of capital in some cases.

" For the first time in history, the Europeans are sticking together," said Judith Hardt, secretary-general of the European Mortgage Federation. "In Europe, where you have thousands of tiny savings banks, they just do not have the know-how to build the sophisticated risk model that the big American banks have."

Washington had hoped to reach an agreement on a new accord by now, but there is no sign of a deal yet.

EU diplomats said that while there might be some merit in the American argument for allowing more complex methods for calculating capital requirements, it might not be the best solution. "That is probably going too far," said one, who suggested that a more reasonable approach could be to allow banks to use their own credit rating as one factor in determining their credit risk, but not necessarily the decisive one.

European banks also argue that many institutions, even in the US, have not received ratings from rating agencies. Up to one quarter of the companies in the UK's FTSE stock index, for example, are not rated.

"Sure, we would like the institutionalisation of what we do," said Richard Thomas, director of financial institutions ratings for Standard & Poor's in London. "But we would be very nervous about banks allocating capital on the basis of credit ratings."

Even if the banks promise attractive returns, he said, "the next thing you know, they may be going bust".

European banks are resisting US attempts to ensure banks set aside extra capital against loans to take account of their perceived risk.