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.
  

