Basel will spice up the banking sector

HUNDREDS of people in this country and thousands around the world are dedicating every moment of their working day to an arcane document whose proposals could have significant repercussions on the share prices and takeover potential of British financial institutions.

The document is the new Basel Capital Accord, brainchild of international financial regulator the Bank for International Settlements. Basel 2, as it is known, is intended to measure financial risk more accurately than the current accord. The project is huge and has already been delayed several times. The costs so far run into tens of millions of pounds and the costs of implementation are likely to be at least £10bn annually.

Essentially, the BIS is trying to fine tune the amount of capital that banks have to set aside to cover their loans. The new proposals are concerned with two types of risk: the sorts of loans a bank makes - asset risk - and the sort of circumstances surrounding the bank that is making the loans - operational risk.

Calculations are fiendishly complicated and many in the industry question whether the benefits of the new regime will justify the enormous expense. Criticism has been rife but experts know the accord will emerge in some shape or form and are working out its effect on the financial industry.

Institutions that specialise in relatively safe lending will have to set aside less capital than they do now to cover their loans. The bigger and more solid a lender is, the less operational risk it will be calculated to carry. The most capital-efficient entities will, therefore, be large groups with very conservative lending policies.

Such logic makes the mortgage banks and the building societies attractive targets for the clearing banks. They would reduce those companies' capital requirements. The new rules may also prove too expensive to justify for smaller firms, who may seek comfort from larger colleagues.

Share prices will clearly be affected. Large conservative lenders will become more attractive and riskier groups should lose ground. At present, prices are chiefly being driven by the forthcoming bank results season. Basel should soon begin to make its presence felt.

Heir apparent

JOHN Ritblat has been chairman and managing director of British Land since 1971, a formidable time at the helm of a FTSE 100 company. He is 66, fighting fit and shows no sign of wanting to slow down.

Investors feel differently. British Land shares trade at a discount of more than 40% to net assets, one of the chunkiest differentials in the sector. Much of this discount is ascribed to Ritblat himself.

Shareholders are wary of Ritblat's propensity for buying, which has left the company with extremely high gearing. Many are wondering if British Land's board might begin this year to consider changes at the top. Ritblat's son, Nicholas, has been with the group for nearly 15 years and an executive director since 1991. If father John wanted to keep the MD role in the family, the appointment of Nicholas could provide an elegant solution.

Peer rpessure

NOW that Halifax and Bank of Scotland are part of one happy family, the English bank has extended its 2% interest offer on current accounts to BoS customers. Royal Bank of Scotland, which owns NatWest, says customers make their choices for a variety of reasons, not just price.

But BoS is Royal Bank's main rival in Scotland. The group may be forced to go back on its brave-sounding words - which could have interesting implications for NatWest account holders.