Basel II helping to improve German banking, says S&P

The proposed Basel II bank safety rules, weak operating performance and shareholder value considerations are behind a trend to more efficient capital allocation, prudent cost control and risk-adjusted pricing in German banking, a leading credit rating agency said today.

The agreement between the German government and the European Commission, the executive body of the European Union (EU), to abolish state guarantees for so-called public law credit institutions from July 2005 might accelerate the trend, said Standard & Poor’s (S&P).

S&P said in a report on the German banking system that it expects continued weak performance in the system next year, based on modest economic growth prospects and severely depressed unrealised reserves in bank financial investments.

But S&P said it is confident there are no immediate threats to the overall liquidity and solvency of the German banking system as a whole.

The Basel Committee on Banking Supervision, the body that effectively regulates international banking, wants to apply the complex Basel II accord to the large international banks of the world’s leading economies from late 2006. The risk-based capital adequacy accord is designed to guard banks against unexpected losses from banking risks, including credit, market and operational risks.

The European Commission plans to apply Basel II via a new capital adequacy directive to all banks and investment firms in the EU, of which Germany is a member state, from the same date.

Last month, credit rating agency Moody’s Investors Service also cited Basel II as a factor encouraging German banks to improve their risk management practices. Moody’s said it believed a renewed focus on profitability and strategic issues in the German banking industry meant the country’s banks would not undergo a systemic crisis.