Telecoms lending - firms must remain vigilant

The Financial Services Authoritys review of 34 banks and investment banks exposures to the telecommunications sector suggests that, to date, most firms are managing the current risks presented by this sector prudently and have implemented appropriate risk management policies. In the FSAs review, the major UK commercial lenders average current exposure and commitments to the telecoms industry was around 40% of group capital and ranged up to around 5% of group assets. The telecoms industry in the UK is sizeable and most telecoms debt held by UK institutions is investment grade.

Michael Foot, Managing Director of the FSA, said:

Given the importance of the telecoms industry and its massive investment programme, sizeable bank exposures to it are not surprising. However, firms need to have high calibre risk management systems in place and need to be acutely aware of the risk of building up concentrations of exposure to the industry, which they might not be able to trade down as quickly as they once hoped. In an industry where financing demands are high and exposures can be rattled up very rapidly, firms should remain particularly alert to any deterioration of conditions. The FSA will continue to monitor this area as part of its ongoing regulation, as well as continuing to liaise with other regulators internationally on this issue.

The FSA is writing to Chief Executives of banks with relevant exposures setting out some of the key messages from the review, and reminding them of risk management sound practice. This includes:

• having a pro-active system for monitoring developments within the telecoms industry. Lenders need to keep abreast of the opportunities and threats posed by new and emerging technology and ensure that material changes in the risk profile of counterparties, or of the market as a whole, are reflected in strategy, limits and pricing.

• having policies to ensure that lending is appropriately diversified, given the lenders target market and overall credit strategy. The policies should take account of any possible correlation among credits in the industry or connected industries.

The FSAs ongoing regulation of banks and investment banks will monitor the extent to which their risk management procedures reflect sound practice

Notes for editors

1. The FSA began this review in summer 2000 and 34 firms provided data as part of the review. The review reflected the FSAs pro-active approach to supervision, and was designed to identify any potential problems in this area. Exposure to this sector has increased rapidly during this year, in part because of the auction of the third generation mobile telephone licences in the UK in April 2000.

2. The types of issues covered by the FSAs review included size of exposures, credit quality and risk management approaches, including the role of the Board of Directors, the use of limit monitoring, the degree of diversification of lending, and the quality of supporting systems.

3. The FSA regulates the financial services industry and has four objectives under the Financial Services and Markets Act 2000: maintaining market confidence; promoting public understanding of the financial system; the protection of consumers; and fighting financial crime.

4. The FSA aims to maintain efficient, orderly and clean financial markets and help retail consumers achieve a fair deal.