II - Special
Agent 003.65 Investigates
had been tipped off about the meeting of the secretive GCMG
(Global Credit Management Group) by the Traditional Accountants' Society (TAS).
Dedicated to backward looking traditional financial management, the TAS
found the GCMG an abomination. Now
ensconced in a nearby broom-cupboard 003.65 could record every word uttered,
utilizing the microphone cannily
hidden in the meeting room earlier.
was just saying; ‘… although it is only due to be introduced from 2006,
banks must have three year’s worth of data in order to take advantage of the
new rules. Therefore Basel II is
already driving up the cost of borrowing for weaker companies.
As you can see
from this diagram, the current Basel Committee rules have led to a very flat
lending price curve, with double-A rated companies paying a margin above LIBOR
that is not much less than the margin paid by triple-B rated companies.
Under the present regime banks have to provide the full 8% own capital
backing for all corporate lending - regardless of the quality of the debtor.
For example it costs a bank just as much to lend to BP as it does to lend
to the likes of Parmalat (pre-bankruptcy), so the flat interest rate ‘curve’
is no surprise.
however banks that can prove their internal credit rating process meets certain
criteria will be able to take advantage of the Basel II rules. That
is to say they will be allowed to hold less capital to back lending to strong
companies, but will have to provide more capital to cover the weak.
This will lead
to a significant increase in the cost of borrowing even for investment grade companies in
the triple-B category, as illustrated on the diagram.
Many companies - those rated by their banks as below investment grade -
may well no longer receive loans at any price.
In fact many privately owned companies in
are already closing because their bank-lines have been withdrawn.’
(Claude thought; ‘I must obtain a copy of that diagram, my report will
be meaningless without it.’)
this mean for proactive credit managers?’ a member of the audience asked.
means increased pressure to provide unsecured supplier credit, particularly to
the companies that banks reject. The
credit rating methodology required under Basel II rules has been largely
designed by the rating agencies, mainly S&P and Moody’s.
Therefore it is highly dependent on statistics.
New businesses and small-medium enterprises (SMEs) will be particularly
severely disadvantaged. It is in
these categories that banks are most likely not to have statistics on file.
If you don't have data available to provide so-called predictive
statistics you can't create a Basel II acceptable rating.
Our role, as the
keepers of the secret power driving commerce and industry, will be to find a way
to fill the gap. Suppliers are the
most important providers of venture capital; they must be assisted in efforts to
develop their markets. GCMG members
are the only ones with the power and the foresight to help suppliers succeed,
but the Traditional Accountants’ Society will try to frustrate us so be on
Claude, little did the speaker know that the TAS would soon receive a full
report on this GCMG meeting. No
doubt the TAS would continue to hold sway, by once again thwarting the power of
credit to generate economic growth.
managed to retrieve a copy of the mentioned diagram from a waste bin and made
this photographic record for his evidence file.
All characters and
organizations mentioned in this article are fictional.
Any similarity between such characters and organizations, and
non-fictional characters and organizations is entirely intended.
Wells is the author of Global
Credit Management - An Executive
Summary, published by John Wiley & Sons Limited (http://eu.wiley.com),
a concise but authoritative work that exposes the power of credit. Credit
activities that are well managed have the power to drive business success.
However credit management functions are often fragmented across organisations
and/or tackled by non-professionals as non-core job functions. The result is the
power of credit is shackled and the organisation forfeits the competitive
advantages that flow from excellent credit management.
© Copyright 2004 R K Wells