November 12, 2014 / 2:51 PM / 5 years ago

UPDATE 1-Basel watchdog flags shake-up of bank capital calculations

(Adds detail)

By Huw Jones

LONDON, Nov 12 (Reuters) - Global banking regulators have outlined how they will crack down on wide variations in the way big banks calculate the size of their capital buffers.

Regulators on the Basel Committee, which sets rules for the sector worldwide, worry that such variations undermine investor confidence in the capital ratios, a key measure of financial health.

The Committee on Wednesday outlined policy measures and fixes it will consult on over the coming year, reflecting a view that there is no single cause or solution to the problem.

It will consult on stricter supervision of computer models the biggest banks use to apportion risk weightings to different assets they hold to determine capital holdings.

“The modifications under consideration will narrow the modelling choices available to banks, particularly in areas which by their nature are not amenable to modelling, and will serve to increase consistency and reduce complexity,” Basel said in a statement.

There would be guidance on how supervisors should vet models used by big banks and other fixes like tighter definitions of defaulting loans.

Medium-sized and smaller lenders use a so-called standardised approach to assessing risks on their books and this will also be reviewed, the committee said.

It will propose a stricter “floor” on capital, which will also be mandatory even for banks which use their own models.

“It will also provide a standardised regulatory-determined risk measure against which capital outcomes calculated using risk models can be compared, allowing for greater comparability across banks,” it said.

Basel is looking at whether considerable simplification is needed in the way bigger banks measure operational risks, such as from potential fines, losses from fraud or systems failures, a timely move as lenders are fined increasing amounts for misconduct.

Existing methods are seen as too complex and unable to properly reflect such risks.

The committee also said it was reviewing the overall structure of the regulatory capital framework to consider whether more fundamental reform is necessary.

Regulators in Britain and the United States have criticised Basel’s rules for being too complex and have put greater emphasis on blunter restraints on banks, such as the leverage ratio, a measure of capital that disregards levels of risk.

The reforms are unlikely to take effect before 2019, when changes already made to bank capital rules have been fully implemented. (Editing by Carolyn Cohn and David Holmes)

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