Newspaper article The Evening Standard (London, England)

Basel 2 Set to Change Bank Shares and Deals Scene

Newspaper article The Evening Standard (London, England)

Basel 2 Set to Change Bank Shares and Deals Scene

Article excerpt

Byline: JOANNE HART

HUNDREDS of people in this country and thousands around the world are dedicating every moment of their working day to an arcane document whose proposals could have significant repercussions on the share prices and takeover potential of British financial institutions.

The document is the new Basel Capital Accord, brainchild of international financial regulator the Bank for International Settlements. Basel 2, as it is known, is intended to measure financial risk more accurately than the current accord. The project is huge and has already been delayed several times. The costs so far run into tens of millions of pounds and the costs of implementation are likely to be at least [pound]10 billion annually.

Essentially, the BIS is trying to fine-tune the amount of capital that banks have to set aside to cover their loans. The new proposalsare concerned with two types of risk: the sorts of loans a bank makes - asset risk - and the sort of circumstances surrounding the bank that is making the loans - operational risk.

Calculations are fiendishly complicated and many in the industry question whether the benefits of the new regime will justify the enormous expense.

Criticism has been rife but experts know the accord will emerge in some shape or form and are working out its effect on the financial industry.

Institutions that specialise in relatively safe lending will have to set aside less capital than they do now to cover their loans. The bigger and more solid a lender is, the less operational risk it will be calculated to carry.

The most capitalefficient entities will, therefore, be large groups with very conservative lending policies.

Such logic makes the mortgage banks and the building societies attractive targets for the clearing banks. They would reduce those companies' capital requirements. …

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