Panel backs offsetting deposits against loansm Support for banks on recouping of debt

BANKS and financial institutions may offset deposits against loans made to the same customer after a default on payment, according to the first guidance notice by the City's new Financial Law Panel, issued yesterday.

The Bank of England is to use the guidance to back an easing of international rules on bank capital, which would allow more widespread netting of deposits against loans.

The panel, assisted by 23 leading law firms, said it was clear that English law was sympathetic to this concept of netting exposures. Without it a bank often finds itself in a queue of creditors even though it is looking after deposits from the same problem customer.

The panel statement, drafted by Michael Crystal QC, said the legal foundation for netting was at least as strong in England as in any other jurisdiction. The panel said clarifying the legal position was important to credit management by banks and to international rules on the capital required to be kept by banks to back their lending.

The Bank of England, sponsor of the panel along with the City Corporation, said its banking supervisors would 'place a great deal of weight' on the panel's judgement when they discussed proposals for wider use of netting with the Basle committee on banking supervision. The committee has proposed more liberal rules, provided netting has proper legal backing. British banks will have to await a formal plan from Basle before taking action.