European bankers hit back yesterday at attempts by the big Wall Street investment banks to have the international capital adequacy rules rewritten to the global banks' advantage.
In a submission tabled the day before the deadline for consultation on rules to replace the 12-year-old Basle accord, the European Banking Federation called for smaller European banks to be given the same leeway in using their own internal risk ratings in assessing the amount of capital they need to set aside to cover bad debts as the more "sophisticated" banks.
Peter Vipond who chairs the Basle capital group of the EBF said that the rules, while arcane to outsiders, would have fundamental implications for the banking industry.
"These proposals will change the face of the industry fundamentally. We have to get them right. There will be banks which have to merge. There will be banks that have to shut down [as a result]," he said. "We want internal ratings for a great deal more banks. Not just the international banks, but French, German, Italian, UK banks."
The 1988 Basle Accord laid down that a blanket minimum anount of banks' capital should be set aside to cover risk of default. But this is now seen as too crude for the task and following lobbying by the bigger banks is set to be replaced with a more flexible regime next year.
The original proposals tabled last year by the committee under the leadership of Bill McDonaugh, chair of the New York Federal Reserve, said internal ratings of debt risk could be used by the top 70 or so banks but smaller insititutions would only be able to rely on external rating agencies like Standard & Poor's, Moody's and Fitch IBCA.
Smaller European banks say they would lose out under the new proposals because far more of their clients will not have external credit ratings.
The amount of regulatory capital banks have to set aside to cover risks is a key factor in determining the profitability of an institution. Hence the larger, more sophisticated banks have been lobbying for the regulators to place greater reliance on qualitative issues, such as the sophistication of a bank's internal controls, and reduce the need for precious capital to be set aside.
Analysts say the new rules could reduce the capital requirements of the larger British banks by billions of pounds, allowing them to step up the rate at which they are returning capital to shareholders through buybacks.
A study by Salomon Smith Barney, the investment bank, last year estimated that Barclays Bank alone would need £1.5bn less capital under the rules.
The current plan is to have a second round of consultation early next year with a view to bringing in the new rules late in 2001.