Basel II bank rules a big step forward -Fed's Kohn

WASHINGTON, March 4 (Reuters) - New Basel II capital adequacy banking rules are an important improvement for the governance of the industry, Federal Reserve Vice Chairman Donald Kohn said on Tuesday.

"It is an important step forward to make the capital requirements more risk-sensitive, so there is less of (these) arbitrage opportunities for banks," Kohn told the Senate Banking Committee during testimony.

He was referring to the practice of some banks of moving mortgage-backed loans into special investment vehicles that were subject to lighter capital requirements.

When the loans went bad, some of the banks had to move these loans back onto their balance sheets, forcing them to take losses and raise billions of dollars in fresh capital. (Reporting by Alister Bull; Editing by James Dalgleish)