* New rule takes effect in 2019
* Covered bonds given effective exemption
* Less strict treatment of credit default swaps
(Recasts with more detail, background)
By Huw Jones
LONDON, April 15 Global regulators have eased a
new rule limiting how much business a bank can undertake with a
single customer, as they try to minimise the risk of fallout
from a counterparty going bust without imposing excessive
burdens on financial firms.
Regulators want to avoid the damage to financial stability
an insolvency can wreak, as seen with the collapse of U.S. bank
Lehman Brothers in 2008 which led to taxpayers bailing out
"In cases where the bank's counterparty is another bank,
large exposure limits will directly contribute towards the
reduction of system-wide contagion risk," the Basel Committee of
banking regulators said in a statement on Tuesday.
The committee, made up of banking supervisors from nearly 30
countries, published the final version of a new rule that will
take effect in 2019, bumping up compliance costs for banks and
potentially limiting how much business they can conduct with a
The existing rule leaves it to supervisors to impose a 25
percent cap on exposures, meaning each exposure cannot be more
than a quarter of the bank's total regulatory capital holdings.
The Basel committee's final rule for all internationally
active lenders, sets the same overall cap but makes it
mandatory, and based on a more conservative and narrower
definition of capital, known as Tier 1. Banks had feared Basel
would opt for an even stricter base of core Tier 1 capital.
The committee also responded to feedback from banks and
other parties to rein in some of its original plans - a common
pattern in the development of new regulations.
It said a bank's exposure to one of the world's top 29
lenders that are deemed to be globally systemically important
would be limited to 15 percent, at the top end of the 10-15
percent originally proposed.
It had aired a similar curb on the next tier of lenders, the
so-called domestic systemically important banks, and on
systemically important non-banks such as clearing houses, but
the final rule includes no such requirement.
Banks will have to report any exposure of 10 percent or
more, though, higher than the 5 percent initially proposed.
In a big reversal, covered bonds, or debt based on top
quality home loans or other assets, will be effectively carved
out of rule. The committee's original proposal offered no
special treatment to the sector, raising industry hackles.
The committee has also decided to allow some netting of
credit default swaps, used by banks to hedge against risks of
default in companies or governments.
The scope of the new rule will extended to cover exposures
to funds, securitisation structures and collective investment
undertakings, the committee said. This brings links between
banks and so-called "shadow" or alternative banking more tightly
under the regulatory net to allow supervisors to monitor and
control risks between the two sectors.
The committee said that by 2016 it would review whether a
limit should be set on a bank's exposure to clearing houses,
currently exempted, which meet new tougher operating standards.
It will also review if the new rule hinders how central
banks conduct monetary policy through money supply.
(Editing by Joshua Franklin and Mark Potter)