Who and where are the Equator Banks? - IILJ

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