Banks protest over capital adequacy plan

Date: 25/11/1999

By Renée Cordes

EUROPEAN mortgage banks have voiced concern about international regulators' plans to require some lending institutions and corporations to set aside more capital to cover credit risks.

Under proposals drawn up by the Basle Committee on Banking Supervision, financial institutions which were not given a credit rating by an outside agency such as Standard & Poor would be forced to have substantially greater reserves to cover bad loans than those which secured such a rating.

The proposals, which could be amended once they have been scrutinised by regulators and industry representatives around the globe, are part of a planned overhaul of rules governing the way financial institutions are run.

Very few European banks and firms currently undergo the cumbersome ratings procedure, in stark contrast to their US counterparts, and the Basle group's plan has run into fierce opposition from the European Mortgage Federation.

The organisation fears that the proposals would put smaller institutions with fewer resources at a disadvantage, as it would not be worth their while to go through the complex and expensive process required to secure a rating.

In addition, the group argues that ratings agencies themselves must be closely scrutinised to ensure impartiality. "The question is who assesses the ratings agencies?" said federation expert David Manning.

The industry's concerns are already partly being addressed by the European Commission, which is currently in the process of overhauling the EU's own rules on banks' credit risks.

The Commission is reviewing Union-wide capital rules which have been in place since 1988 as part of reforms aimed at streamlining financial services rules which were outlined in an action plan published in May. That plan, drafted by former Internal Market Commissioner Mario Monti, seeks to help companies benefit from the single European currency.

According to Monti's plan, lending institutions would not only be required to have adequate capital to support their risks, but also enough to improve the way they monitor and manage those risks.

However, under proposals unveiled by new Internal Market Commissioner Frits Bolkestein this week, supervisors would be able to set different capital requirements according to the risk profile of a particular financial institution.

"The highest standards of prudential regulation of capital adequacy are essential for both financial stability and the smooth functioning of the single market for financial services," states the report. "The EU has to make sure that these standards are kept up to date with market developments and ensure that capital requirements accurately reflect the risks run by banks and investment firms."

European mortgage banks have voiced concern about international regulators' plans to require some lending institutions and corporations to set aside more capital to cover credit risks.