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BASEL II CAPITAL ADEQUACY REVIEW

FLA (Finance & Leasing Association) is the major UK industry body for the asset
finance, consumer finance and motor finance sectors.

ISSUE DESCRIPTION

The Basel II Accord aims to make the international financial system more stable by
imposing more risk sensitive requirements on banks issuing loans.

CURRENT STATUS

The New Capital Accord (Basel II) was published 28 June 2004. The Commission issued
a proposal for Capital Adequacy Directive on 14 June 2004. The European Parliament
(EP) adopted its First Reading on 28 September 2005. The Council agreed to accept all
the EP’s amendments on 11 October. A Common Position will be adopted without
discussion at a forthcoming Council meeting.

FLA ISSUES
FLA ISSUES

FLA wants the EU Directive on Basel II to be broadly consistent with the New Capital
Accord. Banks need to be internationally competitive. US banks in particular could steal
a march if the Directive makes regulation tougher in the EU than elsewhere. Our interest
is in the impact of banking supervision regulation on the provision of asset finance, motor
finance and consumer credit.

Broadly, our position is that the Accord does not give sufficient weight to the security
taken in the asset by providers of asset and motor finance.

To date, the Commission has done a good job on issues that affect FLA members, on
marrying the approach to the draft Directive that meets our objective of broadly staying in
line with the draft Accord.

In addition the draft Directive includes a derogation allowing the national "competent
authorities" to allow 35% Loss Given Default for equipment leasing exposures up to 31
December 2012 (against the "standard" 40% for other collateral). The derogation is to
be reviewed at the end of that period. This derogation is a welcome recognition of asset
finance as a low risk form of finance. Unfortunately this concession is rendered almost
unusable by a requirement to provide collateralisation of 140% of the exposure. This
requirement needs to be made more realistic. FLA is asking the UK Government to
support this. Our European trade body Leaseurope is asking all Member States to
support it too.

We are aware that some MEPs, particularly German MEPs, believe that Basel II will
damage SMEs’ access to bank finance. This may be linked to the way German banking
for SMEs operates. Our own members were sceptical initially, but we have found our
dialogue with the FSA and the current draft of the Accord broadly helpful. Treating SME
business below €1million on an annual basis as ‘retail’ seems rational to FLA members:
it allows SMEs business to be done in a way that is cost-effective for both FLA members
and SMEs.