GERMAN BANKING AUTHORITIES WEIGH SWAP REGULATIONS
German banking authorities are
weighing rules for banks' off-balance sheet activities in an
attempt to cope with the growing volume of sophisticated
capital market instruments, banking sources said.
    Interest rate and currency swaps and currency options are
under closest scrutiny, and if revisions are made they may
resemble regulation jointly proposed by the U.S. And U.K. To
Japan. Juergen Becker, director of the Bundesbank's division of
banking law and credit supervision, said the U.S.-British
proposals were interesting, but declined to elaborate.
    But banking sources said West Germany was more likely to
produce its own conclusions than to adopt foreign proposals.
    "There is no formal plan yet, but talks are in the latter
stages," one representative of the German Banking Association in
Cologne said. Bankers expect rule changes this year.
    All alterations must be approved by the Bundesbank, West
Germany's four major banking associations and the Federal
Banking Supervisory Office.
    Talks have been slowed by the fact that fundamental changes
would require a revision of Germany's credit law, which has
been in effect since 1934.
    Authorities favour reinterpreting the credit law to fit
present circumstances in order to avoid the long parliamentary
political process of changing it, banking sources said.
    Since the beginning of 1984 the banking law has limited
banks' lending to 18 times shareholders' equity plus reserves,
on a consolidated basis.
    But lending ratios do not extend to several newer
instruments such as spot and forward currency contracts,
currency and interest swaps, commercial paper programs,
currency options, interest rate futures in foreign currencies
and various innovative types of interest rate hedges.
    The sources said the main value of the U.S.-U.K. Proposals
lay in differentiating between different types of risk factor,
and, for instance, in placing greater weight on currency swaps
than interest swaps. But even if German banking authorities
agree with some of the assessments of swaps, they disagree on
how to find balance sheet equivalents for the risk.
    U.S.-British proposals include a complicated series of
formulae for assessing the stream of payments involved in
swaps, whose ultimate risk is borne by the financial
intermediary, especially when counterparties remain anonymous.
This is the so-called market-to-market value.
    But German authorities are likely to consider this much too
complex and to base their evaluation instead on a schedule of
lending ratings assigned according to the creditworthiness of
the borrowers involved, the sources said.
    The weightings, also likely if lending ratios are extended
to include banks' securities portfolios, are zero for public
authorities, 20 pct for domestic banks, 50 pct for foreign
banks and 100 pct for other foreign and non-bank borrowers.
    A further complication is that the more flexible
definitions of equity allowed in the U.S. And the U.K. May put
German banks at a competitive disadvantage, the sources said.
    Stricter definitions here also mean the use of a version of
the U.S.-U.K. Proposals could far exceed the intent of the U.S.
And British authorities, the sources said.
    One specialist for Dresdner Bank AG said a long-dated
foreign exchange forward transaction could, for instance, be
brought under the same rule as a cross-currency swap, despite
the fact that the risk may be entirely different.
    How new regulations will affect foreign banks here was
uncertain. Many have converted to full subsidiary status and
applied for a full banking licence over the last two years in
order to lead-manage mark eurobonds.
    But as their equity capital is fairly small, tight lending
ratios will severely hamper foreign banks' freedom of movement,
particularly in the growing business of currency swaps, if they
are required to include more transactions in the balance sheet,
the sources added.
 REUTER
