Basel banking accord could herald cheaper home loans

Cheaper mortgages could be on the way after central bank governors and regulators from the world's leading industrialised nations approved a new set of rules over the weekend to help prevent banking collapses.

The Basel II accord, as it is known, governs how much capital banking organisations must set aside to protect themselves against financial risks and sudden external shocks. The new rules are due to be phased in between the end of 2006 and 2007.

Banking experts said that one of the by-products of the new accord could be cheaper home loans because mortgage lending would be classed as lower risk under the Basel II framework and therefore lenders would be required to hold less capital in reserve.

Jane Leach, a partner in KPMG's financial services practice, said: "Mortgages will not get drastically cheaper overnight but we are likely to see the shaving of a few basis points off many lenders' standard mortgage rates within a year or two of the framework's introduction."

Unlike the original Basel I accord, introduced in 1988, the new framework directly links capital to risk and so the more advanced a bank's approach to risk management, the lower will be its capital requirements. The new framework also gives banks greater incentives to be more transparent in their public reporting.

The new framework was endorsed on Saturday night by central bank governors and heads of bank supervisory authorities from the Group of Ten countries meeting at the Bank for International Settlements in Basel, Switzerland. Disputes among members of the G10, particularly between the US and European countries, and concerns among banks about the costs of compliance had threatened to scupper the new accord more than once during years of protracted negotiations.

Jean-Claude Trichet, the president of the European Central Bank and chairman of the G10 group, welcomed the new accord. "It will enhance banks' safety and soundness, strengthen the stability of the financial system as a whole and improve the financial sector's ability to serve as a source for sustainable growth for the broader economy," he said.

The new and more "risk-sensitive" approach to capital adequacy was generally welcomed. However, a number of observers said a lot would depend on whether the new rules were introduced uniformly by banking regulators in different countries.

KPMG said: "With many items in the framework still being open to national discretion, it is questionable whether there will be a level playing field on an international basis. In the UK, the signs are that the Financial Services Authority will be stricter than most in its interpretation. It would be a pity if UK institutions were put at a disadvantage as a result."