Regulators bow to pressure and ease bank capital rules

Banking regulators, seeking to overhaul a 20-year-old agreement setting minimum world-wide capital standards, have bowed to pressure from Europe and emerging markets to allow a wider circle of banks to use their own internal credit assessments to cut the capital they must hold against bad debt risks.

Banking regulators, seeking to overhaul a 20-year-old agreement setting minimum world-wide capital standards, have bowed to pressure from Europe and emerging markets to allow a wider circle of banks to use their own internal credit assessments to cut the capital they must hold against bad debt risks.

The concession follows claims that the original proposals for updating the 1988 Basle accord were too favourable to the big American banks, and failed to reflect the fact that in some respects banks in countries such as Hong Kong and Singapore are more advanced than in some industrialised countries.

Regulators have also conceded that high-grade corporate lenders from emerging markets can in certain circumstances be treated more favourably for capital purposes than the government of the countries where they are based.

Bill McDonough, chairman of the New York Federal Reserve and head of the Basle review committee, said yesterday that the existing rules, which specify a blanket 8 per cent minimum capital ratio for all banks, had been eroded by innovation in the industry in the last two decades.

He unveiled what is likely to be the final form of the new rules. Two and a half years in the making, they run to 150 pages compared with 30 for the original Basle accord. They build on the approach already adopted in embryonic form by the UK's Financial Services Authority.

Mr McDonough said the new rules, coming into force in 2004, should not change the overall amount of capital in the banking system. However, banks which are able to take advantage of the flexibility in the rules will be able to reduce the amount of regulatory capital they need to hold and either return it to shareholders or use it to expand their business. "This accord essentially rewards those who are good bankers," he said. "It will make a safer and better banking system - a better shock absorber for the economy."

Regulators, he said, were perturbed by the growing trend of banks to resort to securitisation and derivatives to shift liabilities off balance sheets and get round existing rules. However, banks could be given more credit for hedging and the use of collateral and netting (offsetting credit and debits from the same party) to offset risk.

The accord puts greater emphasis on the need for regulators to ensure banks have adequate risk controls, and requires greater disclosure by banks in the hope that investors will shun banks that are not up to scratch.