The UK Association of Corporate Treasurers has responded to the proposals by the Basel Committee for a new capital adequacy framework. These proposals are important for borrowers because they may affect loan margins and loan documentation. The response expresses the Association’s concern that the existing proposals could have negative implications for both of these for many borrowers. The proposal of most direct interest to treasurers is the proposed weighting to be given to corporate loans on bank balance sheets in the ‘standardised approach’ using external ratings. The proposed five-fold increase in capital required for a loan to a single-A rated as opposed to an AA rated company bears no relation to default or loan loss experience in the bond market. Not surprisingly, treasurers of companies with single-A ratings have expressed their concern at being categorised with those of much lower credit standing. This is both unfair to single-A rated companies and also gives rise to considerable uncertainty as to the cost and terms of borrowing for the many companies on the AA-/A+ cusp. The Association has proposed an alternative approach based on internal ratings which, it is hoped, will contribute to the debate over the best way forward. In commenting on the Basel Committee’s proposals, David Creed, Director General of the Association, said ‘We welcome the efforts of the Basel Committee in re-designing the Basel Accord. While we appreciate that the task is a very difficult one, we have concerns that borrowers could be affected significantly and possibly arbitrarily by the Basel Committee’s current proposals. We hope that our response will serve to keep the interests of the borrowing community in the Committee’s mind during the next stage of this project.’
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