The Germans are at it again. Amid a big diplomatic punch-up, the Basle Committee on Banking Supervision failed to release its long-awaited consultation paper on credit risk control and capital adequacy on April 9.
According to peeved participants and observers, this is mainly because German representatives in Basle are determined to protect the special interests of their mortgage banks. As a source at Britain's Financial Services Authority says: "It was a very sticky sticking point." To get the Basle process moving again will take bilateral talks between the US and the Germans.
The Germans enjoy an advantage in three respects.
First, commercial property lending carries a 50% risk weighting for German mortgage banks; everywhere else that privilege applies only to residential mortgages.
Second, Hypotheken banks and Landesbanken can issue Pfandbriefe, which are 10% risk weighted. Banks outside Germany that buy high-quality wholesale assets and fund themselves through the straight debt markets don't have this option.
And finally the risk weighting for German banks' senior unsecured debts is 20%. But these debts are not very senior at all: they are subordinated to the claims of Pfandbrief holders.
"It makes no sense whatsoever," says a top executive at a US investment bank. "It's all about funding costs. The Pfandbrief banks pay Libor minus four to five basis points for a 10-year floater. But Abbey National and Halifax pay Libor plus eight to 10, yet they're better credits."
The Germans authorities have jealously guarded their banks' privileges under BIS guidelines since 1988, despite the complaints of many other OECD countries.
Although some UK and Italian banks are lobbying Basle for a level playing field, their French and Spanish counterparts have decided that if you can't beat the Pfandbrief market, copy it. But the US Federal Reserve is in a serious huff with the Germans.
Germany's financial regulator BaKred curtly declined to tell us about its stance within the Basle committee, or tell us why Pfandbrief-issuing institutions, which have huge balance sheets and (as Euromoney reported last month) take plenty of risk, should need so little capital. There is little chance of establishing a comprehensive, and comprehensible, set of rules for bank capital allocation until such protectionism ceases. Marcus Walker