Basel Committee adopts tighter trading book rules

BASEL, Switzerland (Reuters) - The Basel Committee has adopted the final version of its new rules that will force banks to tie up more capital to offset risky trading book activities with more changes on the way.

The Basel Committee on Banking Supervision, made up of central banks and banking supervisors from across the world, is reforming its Basel II rules, a framework used globally by banks to calculate how much capital they should set aside in case assets tumble in value as they did in the financial crisis.

Basel II was widely seen as failing to ensure banks had a big enough capital buffer to withstand the credit crunch and avert bailouts by governments.

The changes announced on Monday will also require more capital on re-securitised products and better disclosure of securitised assets.

"These additional disclosure requirements will help reduce market uncertainties about the strength of banks' balance sheets related to capital market activities," the committee said in a statement.

The committee will come out with more guidance before the end of the year on how to turn the changes to trading book capital into hard percentage figures for banks to apply.

The changes should be implemented no later than 31 December 2010 while new supervisory guidelines will be introduced immediately.

Assets parked on the trading book had needed less offsetting capital than if they were on a bank's balance sheet, a loophole policymakers were keen to close as soon as possible.

The bulk of the changes adopted are in line with a consultation paper issued earlier this year.

The final version, however, includes a requirement for banks to comply with good practice in pay policies published by the Financial Stability Board, a new global watchdog, in April.

The next batch of changes to Basel II will include tougher standards on how much liquidity or cash a bank must hold to weather sudden shocks, improving the quality of capital held and a simple cap on leverage.

"The Committee is also taking measures to mitigate any excess cyclicality of the minimum capital requirement and to promote a more forward-looking approach to provisioning," the committee said.

(Writing by Huw Jones, Editing by Ron Askew)