BANK OF ENGLAND PROPOSES LIMITS ON UNDERWRITERS
The Bank of England proposed that banks
in Britain for the first time will have to seek authorization
to be lead underwriters of new issues in the euromarkets.
    In addition, the Bank has proposed limits on the amount of
credit risk that firms can take on with each new issue they
lead manage.
    The proposed rules were outlined today in a consultative
paper on large credit exposures taken by recognized banks and
deposit takers and may be modified, the Bank said.
    The rules could affect billions of dollars of eurobond
securities issued each year. In 1986, about 183 billion dlrs of
new eurobonds were offered, according to figures compiled by
Euromoney magazine.
    Up until now, there have been no restrictions on lead
managing eurobond issues.
    However, eurobond market participants believe the Bank of
England is concerned about intense competition for market share
which may have caused some firms to expose themselves to
imprudent credit risk.
    Competition for market share has been a boon to issuers as
banks compete to offer the best terms. But the new rules
suggest that some constraints may be placed on competition as
regulators attempt to ensure that no bank takes on more risk
than it can handle. Banking sources said that while the Bank of
England is reluctant to inhibit competition, it is willing to
accept some constraints in order to ensure that underwriters
act prudently.
    "The Bank's assessment of the appropriateness of a bank's
lead underwriting activity will depend primarily upon the skill
and experience of the lead underwriter in the particular market
concerned...," the Bank's proposal said.
    Once a firm has received permission to act as lead
underwriter, the exposure will be valued at one-sixth of the
face amount of the securities. Nominal exposure exceeding 60
pct of capital must be reported to the Bank of England and it
must be notified in advance for exposure of over 150 pct of
capital.
    The exposure will be determined to exist for a maximum of
28 days following a binding commitment to underwrite. After
that, any remaining exposure from unsold securities will be
assessed at their full face value.
    The rules would not apply to syndicated loan facilities,
revolving credits or commercial paper, the Bank said.
    The Bank also amended other aspects of plans to strengthen
its supervisory powers over banks in the paper, which called
for comments from professionals by March 31 to allow their
possible inclusion in the Banking Bill in time for its planned
final discussion in Parliament, scheduled before summer.
    The new Banking Bill, updating the 1979 Banking Act, is the
third leg of the Conservative government's legislation for the
supervision of financial institutions.
    It is to feature alongside the Financial Services Act,
aimed to bolster investor protection, and the Building
Societies Act, which put these institutions on an equal footing
with banks.
    The proposed legislation would abolish distinctions between
recognised banks and licensed deposit-takers and tighten legal
controls, making it a criminal offence to mislead supervisors.
    Proposals to require banks to inform the Bank of England in
advance of planned exposures in excess of 25 pct of their
capital, and to have the Bank supervise exposures between 10
and 25 pct of capital, were not under debate, the paper showed.
    However, preliminary consultations with bank
representatives had shown some of the initial proposals to be
flawed, it said.
    Most proposed changes involved evaluating exposures on a
case-by-case basis rather than along general lines.
    Amendments involved the Bank's proposed treatment of
exposures by financial institutions acting as banker to other
units of their own group of companies, the paper showed.
    They also regarded the treatment of credit exposure to
local governments and other public sector entities, and of
exposures undertaken by banks that are subsidiaries of banks.
    Proposals on how to value securities given by a debtor as
collateral to a credit were slightly changed, the paper showed.
    Exposures taken on by banks acting as creditor within their
own group of companies would usually be looked into on a
case-by-case basis under new proposals, it said.
    The paper said exposures to state-owned industries and
other public sector authorities in the U.K. and abroad should
be given the more lenient treatment of credits to governments
provided a government gives unconditional repayment guarantees.
    It cautioned that exposures to U.K. local authorities and
those guaranteed by the British Export Credit Guarantee
Department would probably not qualify for such treatment.
    On credits granted by banks which are a subsidiary of
another bank, an earlier-proposed 100 pct of capital ceiling
could be exceeded in individual cases.
    But the parent bank would have to give a formal undertaking
to take over the exposure if problems were to occur, and state
in writing that the exposure was retained in the subsidiary's
balance sheet to meet precise group objectives, the paper said.
    On collateral security, it said this "should normally only
be taken into account when considering the acceptability of a
bank's exposure up to 25 pct of its capital base."
    "The presence of security taken on its own will be
considered by the Bank as an acceptable reason for an exposure
in excess of 25 pct, but only in the most exceptional
circumstances and even then to a very limited extent," it said.
 Reuter
