Risk-Based Capital Standards Taking a Toll in European Credit Markets

By Schantz, Timothy R. | American Banker, September 22, 1993 | Go to article overview

Risk-Based Capital Standards Taking a Toll in European Credit Markets


Schantz, Timothy R., American Banker


Somewhat delayed in both timing and degree relative to the United States, capital constraints are now having an impact on pricing in the European credit markets.

Moreover, treasurers and finance directors of large Europeans corporations expect that margin will continue to widen from current levels over time.

Recent information gathered from a wide range of large companies in the United Kingdom and among the top tier of corporations across continental European markets (including the Nordic region) shows that margins could be expected to rise a further 1/8 0/0 from current levels if international credit facilities now in place were to be renegotiated during 1993.

Borrowers Surveyed

Specifically, respondents that have international term credit facilities -- either drawn or standby, with an original maturity of four to seven years -- were asked just what the all-in cost on these facilities would be if drawn (lending margin, plus facility and agency fees, plus front-end fees), expressed as an average blended margin per year over the London interbank offered rate or its equivalent.

They also provided the same information based on an estimate of what these costs would have been two years before and if the underlying facilities were to be renegotiated over the 12 months following the interview periods, which were December-February 1991-92 and 1992-93. The evidence is striking.

Continuing Pressure Seen

With information drawn from more than 250 of the large British companies that we investigated, all-in margins are estimated to have risen from just under 30 basis points in 1989-90 to over 50 basis points today.

Moreover, treasurers in Britain foresee continuing upward pressure on margins -- to 66 basis points -- should facilities now in place be renegotiated over the next year.

And, if the past is any indication, these projections are impressive in terms of their accuracy, with the anticipated margins of one year ago within 3 basis points of those actually realized.

Similarly, information drawn from over 150 of the largest corporations across continental Europe indicates that all-in margins have risen from roughly 20 basis points in 1989-90 to almost 35 basis points today, with a further rise to almost 50 basis points expected if facilities now in place are renegotiated in the year ahead.

It'a a Seller's Market Now

While these margins alone still do not provide adequate risk-adjusted returns on capital for the banking industry as a whole, they do represent a significant shift away from the almost unrivaled "borrower's market" that prevailed during most of the past decade.

They also incorporate a progressive differentiation in risk assessment as lenders become more discriminating about individual credits and potential exposure to country risks -- both conditions conspicuously lacking during the latter stages of the 1980's boom.

Illustrating this phenomenon is a comparison drawn from our surveys of the large corporate markets in Germany (still Europe's dominant economy despite the onset of recession) and the four Nordic markets (where economic conditions are at their lowest ebb in roughly 50 years).

Just two years ago, all-in margins separating the two areas were estimated to be less than 1/8 0/0, whereas today the differential is some 30 basis points. …

The rest of this article is only available to active members of Questia

Already a member? Log in now.

Notes for this article

Add a new note
If you are trying to select text to create highlights or citations, remember that you must now click or tap on the first word, and then click or tap on the last word.
One moment ...
Default project is now your active project.
Project items
Notes
Cite this article

Cited article

Style
Citations are available only to our active members.
Buy instant access to cite pages or passages in MLA 8, MLA 7, APA and Chicago citation styles.

(Einhorn, 1992, p. 25)

(Einhorn 25)

(Einhorn 25)

1. Lois J. Einhorn, Abraham Lincoln, the Orator: Penetrating the Lincoln Legend (Westport, CT: Greenwood Press, 1992), 25, http://www.questia.com/read/27419298.

Note: primary sources have slightly different requirements for citation. Please see these guidelines for more information.

Cited article

Risk-Based Capital Standards Taking a Toll in European Credit Markets
Settings

Settings

Typeface
Text size Smaller Larger Reset View mode
Search within

Search within this article

Look up

Look up a word

  • Dictionary
  • Thesaurus
Please submit a word or phrase above.
Print this page

Print this page

Why can't I print more than one page at a time?

Help
Full screen
Items saved from this article
  • Highlights & Notes
  • Citations
Some of your highlights are legacy items.

Highlights saved before July 30, 2012 will not be displayed on their respective source pages.

You can easily re-create the highlights by opening the book page or article, selecting the text, and clicking “Highlight.”

matching results for page

    Questia reader help

    How to highlight and cite specific passages

    1. Click or tap the first word you want to select.
    2. Click or tap the last word you want to select, and you’ll see everything in between get selected.
    3. You’ll then get a menu of options like creating a highlight or a citation from that passage of text.

    OK, got it!

    Cited passage

    Style
    Citations are available only to our active members.
    Buy instant access to cite pages or passages in MLA 8, MLA 7, APA and Chicago citation styles.

    "Portraying himself as an honest, ordinary person helped Lincoln identify with his audiences." (Einhorn, 1992, p. 25).

    "Portraying himself as an honest, ordinary person helped Lincoln identify with his audiences." (Einhorn 25)

    "Portraying himself as an honest, ordinary person helped Lincoln identify with his audiences." (Einhorn 25)

    "Portraying himself as an honest, ordinary person helped Lincoln identify with his audiences."1

    1. Lois J. Einhorn, Abraham Lincoln, the Orator: Penetrating the Lincoln Legend (Westport, CT: Greenwood Press, 1992), 25, http://www.questia.com/read/27419298.

    Cited passage

    Thanks for trying Questia!

    Please continue trying out our research tools, but please note, full functionality is available only to our active members.

    Your work will be lost once you leave this Web page.

    Buy instant access to save your work.

    Already a member? Log in now.

    Search by... Author
    Show... All Results Primary Sources Peer-reviewed

    Oops!

    An unknown error has occurred. Please click the button below to reload the page. If the problem persists, please try again in a little while.