| BUSINESSWEEK ONLINE : OCTOBER 4, 1999 ISSUE | ||||||||
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| INTERNATIONAL -- SPECIAL REPORT
A Big Brouhaha in the Banking World (int'l edition) The proposal to make lending rules stricter has Germans and Japanese up in arms Hans Tietmeyer rarely loses his cool. But he did in April when, still president of the German Bundesbank, he read a draft report from the Basel Committee on Banking Supervision. Its reform proposals would double to 8% the amount of capital that German banks need to set aside against commercial real estate loans. Incensed, he called committee chairman William J. McDonough, president of the Federal Reserve Bank of New York, to delay publication. Tietmeyer, now retired, argued that the change would discriminate unfairly against German banks. Historically, they have a far better real estate lending record than their international counterparts, he reasoned. After much behind-the-scenes diplomacy, the Germans may get the exemption they want. The tussle with the Germans is just one part of a big row in the banking world over the new proposals. The new rules drawn up at the Basel-based Bank for International Settlements, the central bankers' central bank, are designed to ensure that banks can't stretch their capital so thinly that they risk collapse if their lending goes bad. The proposals, finally published for comment in June, would force banks to pay far more attention to the creditworthiness of the countries and companies they lend to. So banks would have a new incentive to lend more to the better-managed emerging-market nations, and big crises like the one that hit Asia might be avoided. ''AT A DISADVANTAGE.'' Yet the proposals have still stirred up a storm. By far the most controversial measure would compel lending institutions to use credit ratings from agencies such as Moody's Investors Service and McGraw-Hill's Standard & Poor's or the Anglo-American firm Fitch IBCA in assessing how much capital they should set aside when making a loan. Bankers in Germany, France, and Italy are livid at what smacks of an Anglo-Saxon takeover. And top-drawer banks are lobbying hard to have the proposals amended. ''The problem is that fewer than 200 companies in Germany are rated by external agencies,'' says Christoph Hedrich, a senior economist at Commerzbank in Frankfurt. ''So we'll be at a disadvantage.'' Under the present rules, in operation since 1988, banks must back every corporate loan they make with capital equivalent to 8% of its value: Only the Europeans have an exemption for real estate. But with the new proposals, the amount will vary according to the borrower's credit rating. Banks would need to reserve just 1.6% for companies with the highest ratings and as much as 12% for companies with ratings of B- or below. Loans to unrated companies, like most in Germany, would require an 8% reserve, regardless of how sound they appear to be. But in the U.S., where companies with top-grade ratings abound, banks would be able to reduce the amount they reserve. ''In other words, American banks would be able to lend more for each dollar of capital than our banks,'' complains Karl-Heinz Boos, a director of the German Bankers' Federation in Berlin. ''That's hardly a level playing field.'' Instead, the Germans want to use the internal credit ratings that they and most other global banks draw up for themselves. Lenders from other countries are just as concerned. Japanese banks, which have been struggling to boost flagging capital ratios for years, worry that they will also lose out because so few Japanese companies have external ratings. ''The new proposals could even cause a credit crunch in Japan by discouraging banks from lending,'' says one economist in Tokyo. ''That's the last thing we need.'' Surprise, surprise: Many U.S. banks, too, would love to see their own internal ratings given the same status as those of the public agencies. ''And I'll tell you why,'' says a consultant who has discussed the issue with Citigroup, Chase Manhattan Bank, and Bank of America. ''They hate the idea of using the public agencies because they think their systems are better.'' The banks argue that they risk their own capital, so they will be tougher than the rating agencies, which don't. They also knock the ratings agencies for failing to warn of the impending financial crisis in Asia in 1997 or the Russian crisis of 1998. The rating agencies insist their record is good, despite occasional flubs. ''Yes, we made mistakes in Asia, but so did everyone,'' says Robin Monro-Davies, chief executive of Fitch-IBCA. And Barbara A. Ridpath, a consultant coordinating S&P's response to the Basel proposals, argues that agencies' ratings can easily be validated by looking at the default record of the borrowers they have rated. Besides, she adds, it will be difficult for regulators to ensure that banks' ratings are up to scratch. In some ways, the squabble over ratings is a high-stakes phony war. The Basel Committee accepts that banks should eventually be able to use their internal ratings. But to prevent abuse, it is insisting that national banking supervisors first validate the quality of ratings produced by each bank in their jurisdictions. The process could take years, especially in Germany, where the watchdogs are chronically short of staff. Just two bank supervisors are assigned to monitor mighty Deutsche Bank, for example. By contrast, 14 officials supervise ABN Amro Holding, the Dutch bank of similar size and complexity. Despite the rivalries and spats, most bankers accept that the current rules are outdated. By applying the same capital requirements to all corporate loans, they encourage banks to lend to less creditworthy borrowers, to whom they can charge higher interest rates--rather than top-rated companies that can raise money more cheaply. ''So the regulations actually increase the riskiness of many banks' loan portfolios,'' says Neil McLeish, head of European bank research at Morgan Stanley Dean Witter in London. Besides, the regulations haven't kept up with such changes as the huge increase in securitization, where banks sell repackaged loans to secondary markets. The existing rules are similarly out of sync when it comes to lending to countries. Currently, banks don't have to provide capital against the loans they make to governments in the Paris-based Organization for Economic Cooperation & Development. So Hungary, rated BBB, is treated the same as Germany, rated AAA. But banks must set aside $8 million for every $100 million they lend to other countries, even if, like Israel, they have a higher rating than some OECD members. If the new proposals are finally accepted, that will change to reflect countries' credit ratings. The reserves will range from zero for top-rated borrowers to 12% for countries rated below B-. That should encourage private-sector banks to lend more to better-rated developing countries than they do now. All the same, the banks will put enormous pressure on the Basel Committee to change its proposals. They are basically hopeful of a happy resolution. ''We're at the beginning of the consultative period, and the committee has made it plain it wants to hear what the banks have to say,'' says Barbara Matthews, a banking specialist at the Institute of International Finance. But the committee's ultimate decision may depend on politics as much as pressure from the banks. ''The fact is that the U.S. Treasury and Fed are very keen on these changes,'' says one observer close to the Basel action. ''And if they have given way on things like real-estate lending, they'll be less inclined to be flexible when it comes to internal credit ratings.'' By David Fairlamb in Frankfurt _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ BACK TO TOP |
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