APPENDIX 3.1 (referred to in paragraphs 2.11, 3.6, 4.26, 4.39, 5.7 and 8.26)
Explanation of technical terms Leasing
1. A form of credit whereby the lessor acquires the asset to be financed and retains title to it while the lessee enjoys all the benefits of ownership in exchange for periodic rental payments (which are calculated so as to cover interest and capital) over a fixed term. While payments and terms can be structured to meet the requirements of individual lessees, payments are normally made on a monthly or quarterly basis over a three-year or five-year term.
Leasing categories
2. The leasing market may be subdivided into three categories, determined primarily by value and the products being financed. The generally accepted terms for these categories are:
Value range Large-ticket Medium-ticket Small-ticket > £250,000 £20,000 - £250,000 < £20,000 Typical examples Aircraft, ships, heavy plant, etc Plant and machinery, printing presses, etc Office equipment, cars, etc
Small-ticket lease transaction
3. To help understand the manner in which the market operates, we outline below details of a typical sales-aid transaction. 4. A user wishes to acquire from a dealer an item of office equipment. The customer can choose to acquire the asset through outright purchase, or through a finance package offered by the dealer (ie from a leasing company), or by arranging his own finance through a bank or other institution. 5. If the customer decides to lease, a credit application form is completed. If, after enquiry, the customer was found to be creditworthy the lease would be accepted. The leasing company would pay the dealer and enter into a lease with the customer. From this time the customer would make payments to the leasing company under a finance lease agreement. Office equipment dealers typically deal with more than one sales-aid leasing company. 6. The dealer's choice of leasing company would depend on the following factors: (a) (b) the terms offered (ie rate and length of lease); the difference in underwriting criteria;
(c) the speed of the underwriting decision; (d) the speed of payment of the supplier/commission structure; and (e) special schemes offered (eg the inclusion of maintenance costs within the leasing contract).
57
Instalment credit
7. This is a form of credit whereby the finance company advances funds to the customer to purchase an asset in exchange for periodic payments (which are calculated so as to cover interest and capital) over a fixed term. Title to the asset remains with the customer and is protected by the Consumer Credit Act 1974. However, liability to the finance company is secured on the asset.
The Cooke Ratio Definition
8. The Cooke Ratio (named after the Chairman of the Committee which devised it), more widely known in the United Kingdom as the risk asset ratio (RAR), is a yardstick to measure the adequacy of a bank's capital in relation to the risk-adjusted loans and advances it makes. A committee of representatives of leading industrial nations (forming the Group of Ten countries) met over several years to secure international convergence of supervisory regulations governing the capital adequacy of international banks. Meetings of the Committee were held at the Bank of International Settlements, Basle, and the resulting Agreement (The Basle Convergence Agreement), reached in 1988, is to be implemented not later than 31 December 1992. Under the Agreement, each bank's capital must be at a ratio of at least 8 per cent of its risk-adjusted assets. (Within the EC, the Solvency Ratio Directive, to be implemented by the end of 1990, establishes minimum solvency ratios, similar to the Cooke Ratio, to be maintained by credit institutions. See paragraph 7(b) of Appendix 4.2.)
Risk-adjusted assets
9. A bank's assets, primarily the loans and advances which it makes to its customers, are risk assets to the extent that customers may default on repayment: such default could render the bank unable to repay its own borrowings when due or its customers on demand. In the calculation of the Cooke Ratio, the risks related to each type of lending are weighted in accordance with an agreed, predetermined, detailed formula. The total of all such weighted assets becomes the bank's `risk-adjusted assets'.
Capital
10. Under the Agreement, detailed rules exist as to the constituents of `capital'. In summary, a bank's capital is divided between: (a) Tier 1: core capital (including permanent shareholders' equity, disclosed reserves, and retained profits, less intangibles, etc); and (b) Tier 2: supplementary capital (including undisclosed and revaluation reserves, general provisions, perpetual preferred shares, subordinated debt, etc). At the end of 1992 the minimum standard for capital will be 8 per cent, as measured by the Cooke Ratio (RAR), with specifications for components of core and supplementary capital. Any losses incurred by a bank on its risk assets must first be met out of its capital (which to that extent protects the bank's `noncapital' lenders and depositors).
Objectives
11. The Committee's work on regulatory convergence had two fundamental objectives:
58
(a) the new framework should serve to strengthen the soundness and stability of the international banking system; and (b) the framework should be fair and have a high degree of consistency in its application to banks in different countries, with a view to diminishing an existing source of competitive inequality among international banks.
Investment certificates
12. Investment Certificates, introduced by the French Law No 83-1 of 3 January 1983, carry all the pecuniary rights attaching to shares (cash dividends, preferential subscription rights, rights to reserves and liquidation surplus) and entitle their holders to the same information as shareholders. They do not, however, carry any voting rights. Voting certificates must be issued to the holders of the voting shares pro rata to their shareholding in the same number as that of the Investment Certificates. Outstanding Certificates must not exceed more than one-quarter of an issuer's issued share capital. The decision to issue Investment Certificates and the corresponding voting certificates may only be taken by resolution of the shareholders in extraordinary general meeting.
59