Who and where are the Equator Banks? - IILJ
Who and where are the Equator Banks? - IILJ
Who and where are the Equator Banks? - IILJ
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government support). It will be interesting to see whe<strong>the</strong>r banking<br />
supervisors will treat projects which <strong>are</strong> compliant with <strong>the</strong> Principles as<br />
contributing towards a higher supervisory rating grade <strong>and</strong> <strong>the</strong>reby<br />
requiring a reduced risk weighting.<br />
<strong>Banks</strong> that qualify for <strong>the</strong> advanced IRB approach <strong>are</strong> entitled to rely on<br />
<strong>the</strong>ir own internal estimates of risk components in determining <strong>the</strong> capital<br />
requirement for a given exposure. In order to achieve this st<strong>and</strong>ard, a bank<br />
must satisfy its supervisor that its credit risk management practices comply<br />
with certain minimum criteria. One such requirement is a credible track<br />
record in <strong>the</strong> use of internal ratings information for at least three years prior<br />
to qualification. To <strong>the</strong> extent that, based on such records, a bank has<br />
historical experience that projects which <strong>are</strong> Principles-compliant have<br />
lower default rates <strong>and</strong> loss estimates than similar projects which <strong>are</strong> not<br />
Principles-compliant, it would be entitled to allocate its own risk-weighting<br />
to <strong>the</strong> relevant risk component, which means that it could offer more<br />
competitive pricing to such a project. Similarly, compliance with <strong>the</strong><br />
Principles could justify a bank reducing <strong>the</strong> capital charge allocated to <strong>the</strong><br />
operational risk associated with <strong>the</strong> financing of such a project if this would<br />
mitigate <strong>the</strong> risk of <strong>the</strong> bank becoming directly liable for environmental<br />
losses.<br />
Linked to Basel II is <strong>the</strong> view of <strong>the</strong> rating agencies on <strong>the</strong> credit st<strong>and</strong>ing<br />
of banks <strong>and</strong> sponsors. Fitch Rating has stated that ‘in reflecting corporate<br />
governance within Fitch’s rating process, <strong>the</strong> focus primarily will be on<br />
how weak practices can impair a company’s financial position with<br />
somewhat less focus on how strong practices might help to enhance credit<br />
quality.’ However, our inquiries of rating agencies during <strong>the</strong> survey<br />
indicate that while corporate governance generally may be on <strong>the</strong> radar<br />
screen of <strong>the</strong> agencies, <strong>the</strong> Principles <strong>are</strong> not.<br />
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In <strong>the</strong> light of <strong>the</strong>se advantages, why have some major project finance<br />
banks opted to stay out of <strong>the</strong> <strong>Equator</strong> fold? Their reluctance, of course, is<br />
not attributable to lack of concern about environmental <strong>and</strong> human rights<br />
issues, but to more sophisticated doubts about <strong>the</strong> value of <strong>the</strong> <strong>Equator</strong><br />
process. It should be noted, incidentally, that <strong>the</strong> motivation of some (at<br />
least) of <strong>the</strong> non-<strong>Equator</strong> <strong>Banks</strong> in not adopting <strong>the</strong> Principles may bear<br />
comparison with <strong>the</strong> motives attributed by NGOs to those whom NGOs<br />
describe as ‘<strong>the</strong> PR <strong>Equator</strong> <strong>Banks</strong>’, i.e. <strong>Equator</strong> <strong>Banks</strong> which have adopted<br />
<strong>the</strong> Principles but <strong>are</strong> alleged to have done little more than emblazon <strong>the</strong><br />
Principles on <strong>the</strong>ir websites. This criticism may be unjust to those banks<br />
which do not engage heavily in project finance but which have adopted <strong>the</strong><br />
Principles in response to sh<strong>are</strong>holder pressure.<br />
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