S&P blames rules for banks' woes: Downgradings will not be reversed quickly because of structural changes

INTERNATIONAL regulations to raise the amount of capital held by banks were blamed yesterday by the credit rating agency Standard and Poor's for encouraging loss-making lending during the 1980s.

S&P also said downgradings of the credit ratings of European banks would not be reversed when the economy recovered, because of fundamental, structural changes in the industry.

Barry Hancock, a European banks specialist at S&P, said many banks had found lending to traditional corporate customers unattractive in the 1980s because of both low margins and rising requirements for capital to be set aside to back the loans.

As a result banks rushed into lending to small companies, property, leveraged buyouts and other riskier areas with higher margins.

Introducing a review of the credit rating outlook for 1994, he said: 'We have seen many banks pay a high price for some of these riskier decisions,' made a few years ago when the Bank for International Settlements' capital standards were introduced.

Mr Hancock said there was also concern that the risk weightings assigned under the BIS rules to different types of loans would be used wrongly by banks in making judgements on the credit quality of loans, which was not their purpose.

The banking industry accounted for the bulk of the reductions in credit ratings assigned by S&P in Europe, with 23 downgradings compared with 34 in 1992. The agency said: 'In most European markets the recession and weak real estate market played a part in declining bank credit quality. But this does not mean that the decline will be temporary and that ratings will rebound as the economy recovers.'

The banks whose credit ratings worsened were concentrated in the Nordic region, France and Italy, while the UK was almost untouched.

The only downgrading in the UK was Britannia Building Society, because of loan quality problems caused by the housing market downturn.

Among companies, four were downgraded, including Tiphook, which was cut in February and again in July because of 'weak market conditions and extremely poor performance'. This compares with 11 downgrades in 1992, when there were no upgrades compared with two this year - Grand Metropolitan and Reed Publishing.

The overall picture in Europe has stabilised compared with 1992, with downgrades more frequent than upgrades but by a much smaller margin. There were 48 downgrades and seven upgrades compared with 65 downgrades and no upgrades in 1992, the worst year so far. The problem areas for 1994 are where there are structural problems as well as the effects of recession, mainly the motor and energy industries.

S&P said ratings should be more stable in 1994 as downgrades slow further and upgrades begin to rise, though Europe was unlikely to see US-style improvement. In most markets outside the US, credit ratings slipped last year, with Japan particularly hard hit.