Banks breathed a sigh of relief yesterday after the Basel Committee on Banking Supervision said tough regulations aimed at avoiding a financial crash would not be introduced until 2005, a year later than the date envisaged.
The new framework, called the Basel 2 accord, overhauled existing rules on capital adequacy that date to 1988, before the Asian and Russian financial crises. Capital adequacy refers to how much capital banks must set aside to cover risks such as bad debts and fraud. The present regime has been criticised for assuming that all banks take on the same risks.
The Switzerland-based Basel Committee has encountered fierce opposition from many quarters of the banking industry towards its proposals to tighten the rules and encourage banks to invest in more sophisticated risk-assessment technology. It said yesterday that a finalised accord would not be published until next year, with implementation following three years later. This extended timetable gives the committee an extra year's consultation with the industry.
The committee shelved proposals for banks to set aside reserves worth 20 per cent of loans, against a previous guideline of 8 per cent. It declined to indicate a new target.
"The committee has concluded that the target proportion of regulatory capital related to operational risk will be reduced, in line with the view that this reflects too large an allocation of regulatory capital to this risk," it said. The committee also scaled back banks' capital adequacy requirements for lending to small businesses.
Basel's move drew praise from the industry. "There remains a lot to be done, but this announcement presents the industry, Basel and the EU with a real opportunity to get things right," said Ian Mullen, chief executive of the British Bankers Association. "The level of capital required under the [earlier] proposals was an issue of general concern. We are now heading in the right direction, downward."
The German Banking Federation said the extra year's consultation would smooth implentation of the new rules and welcomed the scaling back of proposals on small businesses. Germans banks have long argued that Basel 2 put them at a disadvantage because they stress small-business lending.Reuse content