Basel regulators unveil plan to capture bank risks

BRUSSELS, July 22 (Reuters) - Bigger banks will have to set aside more capital to cover a wider range of risks on their trading books under plans published on Tuesday to apply lessons learnt from the subprime crisis.

New guidelines drafted by the Basel Committee of global banking regulators mean more capital will be tied up at banks which pursue riskier business strategies.

Banks such as UBS (UBSN.VX), Merrill Lynch MER.N and Citi (C.N) have been forced to write down well over $300 billion in risky assets tied to poor quality U.S. home loans, an exposure to risk not covered in current guidelines which refer only to risk of default.

The guidelines will force banks to top up this basic capital if they are also exposed to other kinds of risks. These include potential losses due to a credit rating agency downgrade or a loss due to a change in the price of an equity instrument.

The big writedowns by banks were mainly due to massive downgrades to securitised assets rather than defaults in those securitised assets.

"Against this backdrop, the Basel Committee's incremental risk proposal will better align regulatory capital requirements with the risk exposure of banks' trading book positions," said Nout Wellink, chairman of the committee and president of the Dutch central bank.

Public consultation runs until October and the committee will publish definitive guidelines by the end of the year.

The changes will be mandatory for all banks which have such assets on their trading books. In practice these are usually only the larger international banks. In the European Union the guidelines will be included in a revision of the bloc's capital requirements directive.

The changes take effect in two stages with the revised rules on basic default capital and risk from downgrades coming into effect from Jan. 1, 2010. Banks will have an additional year to reflect other risks within the scope of the guidelines as they are harder to model.

The guidelines need updating as when they were introduced trading books held largely "plain vanilla" assets such as stocks and bonds.

Since then securitisation has taken off and banks hold more complex assets such as mortgage-backed securities which became untradeable as the subprime crisis, now a year old, unfolded.

"What we might see in practice is that banks take an integrated approach and have an internal model that captures all the risks," an official from the Basel Committee secretariat said. "We are definitely capturing risks which have led to the problems of the last few months."

The guidelines won't apply to smaller banks that use the so-called standardised approach for assessing capital requirements.

The Basel Committee expects spell out the likely impact of the new rules on banks before the end of the year.

Later this year, the committee will also release a consultation document on how to assess risk from securitised products held off a bank's trading book.

(Reporting by Huw Jones, editing by David Stamp)