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Debt: What next for the public sector institutions?

Europe’s supranational and agency borrowers are becoming ever bigger issuers in the international capital markets even as their historical missions appear to have been met and the banking and financial market to have matured enough to finance at commercial rates most of the lending risks the agencies assume. The debate as to whether these subsidized institutions distort or complement the capital markets continues unabated, as private lenders submit to capital adequacy directives that do not extend to the agencies. Alex Chambers reports.

Most supranationals and agencies have been in place for about 50 years and are a key part of the world’s financial infrastructure. They are still getting bigger and their lending has a profound impact on the commercial sector. But they are not governed by the same rules as commercial banks and their proper role is a matter of debate.

MUCH OF THE argument over the new banking regulatory regimes initiated in the past few years has centred on ensuring a level playing field. Nevertheless, no one thought to include the supranationals and agencies in these discussions. In 2007 the larger European banks will be regulated under Basle II. But KfW, Instituto de Crédito Oficial, Caisse des Dépôts et Consignations, Cassa Depositi e Prestiti, OKB and supranationals such as the European Investment Bank are all institutions to which the EU’s Banking Consolidation Directive applies only for limited supervisory purposes. They are not required to comply with the Capital Adequacy Directive 3, which imposes minimum capital requirements.

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