Bankers bow to pressure on rules

Banking regulators have bowed to pressure from Europe and emerging markets and will let more banks use their own internal credit assessments to cut the capital they must hold against bad-debt risks.

Regulators were seeking to overhaul a 20-year agreement which sets minimum capital standards.

Their concession follows claims that the original proposals for updating the 1988 Basle accord favoured big American banks too much, and did not reflect that in some respects banks in countries such as Hong Kong and Singapore are more advanced than those in other industrialised countries.

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

Bill McDonough, chairman of the New York Federal Reserve and head of the Basle review committee, said the existing rules, which specify a blanket 8 per cent minimum capital ratio for all banks, had been eroded by innovation in the industry over the past 20 years.

The new rules, coming into force in 2004, should not change the overall amount of capital in the banking system, said Mr McDonough.

Banks which were able to take advantage of the flexibility in the rules would be able to reduce the amount of regulatory capital they needed to hold and 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."

He said regulators 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.

But 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.

- HERALD CORRESPONDENT