Outlook: Capital rules

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The Independent Online
IT WOULD be easy to pick holes in the new proposals for minimum capital requirements from the Basle Committee. After all, what it boils down to is getting banks and supervisors alike to be a lot more careful about the riskiness of bank lending and the cushion of bank capital. The idea is to have less risk and more cushion, in the wake of the turbulence that has afflicted the banking system during the past two years.

What's more, realpolitik has already shaped the proposals even before they went out to consultation. Yesterday's paper was delayed by two months in order to find some way to permit German banks to hold less capital against commercial mortgages than US banks. Real estate lending is risky in principle, but the German banks would be at a commercial disadvantage if the framework could not recognise that their loans were less risky in practice than the American equivalent.

However, finding fault would be too easy. The essential difference between the new framework and the old is the admission of judgement.

Rather than applying one standard rule to all banks, it will be up to regulators to allow - or force - individual banks to deviate from the basic requirement, depending on their assessments of each banking institution. And it will be up to banks themselves to make adequate provision for the riskiness of the loans they are making.

The trouble with the existing 8 per cent fits all approach is that it relieved banks and supervisors from the responsibility of making such judgements. Now they will have to do so. It will be more difficult to apply, but that's a fact of life. International banking supervision is growing up.