Risk & Compliance

Basel Faulty

The Basel Committee on Banking Supervision's new banking guidelines face criticism.
Adam LincolnApril 15, 2001

Even at the height of E-commerce fever in 1999, local bankers in Asia and Europe didn’t fall over themselves to lend money to fledgling dot-coms. Few start-ups had the receivables or assets to qualify for loan facilities or lines of credit. Moreover, capital adequacy ratios set by the Basel, Switzerland-based Bank for Settlement’s Capital Accord — as well as BIS’s credit risk guidelines — limited what local lenders could do.

Despite criticism, the initial BIS guidelines likely saved Asian and European banks millions in nonperforming loans. But in January, the Basel Committee on Banking Supervision released details of its revised banking guidelines, called the new Basel Capital Accord, or Basel II.

So far, II’s been about as popular as I. In Europe, officials at Germany’s Bundesbank reportedly criticized the relatively short discussion period for the accord (it ends on May 31). In Asia, managers at some smaller companies complain that Basel II will lower adequacy ratios on loans to healthy corporations, but will raise the bar on loans to less-sound businesses. Dot-coms tend to fit that description.

Moreover, Basel II gives some banks the option of using their internal risk ratings systems to evaluate corporate borrowers. In the wake of the Asian financial crisis, these credit tests might be more stringent than those employed by external ratings agencies.

Then again, CFOs at Asian companies have not been beating a path to Moody’s. In fact, many have been loath to spend thousands of dollars to secure a rating, since it might turn out to be a millstone. As Alison Murray, an analyst at Merrill Lynch in Hong Kong, observes: “They receive more-favorable treatment — and by implication, lower funding costs — by remaining unrated.”

Privately, execs at some E-commerce companies say they’d like to to burn the 500-page document. But that might be shortsighted. Basel II isn’t scheduled to take effect until 2004. By then, a few dot-coms could be making money — and might qualify for credit under the new guidelines.