Fleet News

Tax expert warns of leasing rates rise

NEW rules governing the way banks lend money could trigger a significant hike in leasing rates for fleets throughout Europe, a top tax expert has warned.

Due for introduction in two years' time, the regulations could spark a revolution in corporate lending, making leasing a more expensive business to be in and persuading some firms to pull out of the market.

The changes are contained within the complicated measures for financial regulation set out in financial legislation Basel II.

To protect consumers, banks must have reserve capital to offset the risks of their lending. Basel II tries to set out the level of reserves needed. The higher the risk, the higher the capital required, delegates at the Fleet News Europe Conference, in Brussels, were told.

Under current European plans, operating leases would be treated as unsecured loans and would be one of the highest risks, while residual values would have to be 100% risk weighted, so banks would have to provide reserves to match the predicted values of their vehicles.

The potential impact could be wide-ranging and serious, according to George Tonks, director of asset finance consultancy Invigors.

As a result of funders having to put more money aside to balance the risk, the cost of funding in those particular sectors will have to increase, with an inevitable knock-on effect on contract hire rates.

He said: 'Covering residual values will require additional capital and if the return stays as it is now, that makes it less attractive as a use of capital.'

Tonks said it was possible the changes could prompt some banks to steer away from the leasing sector, although finance leases will be treated as secured loans and could become more favourable under the new regime. He added: 'Overall, Basel II presents an opportunity rather than a threat and it is up to you to take advantages of these opportunities.'

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