December 22, 2014 / 2:40 PM / 5 years ago

Basel watchdog wants standardized assessment of banks' capital

LONDON (Reuters) - Global regulators have outlined measures to ensure capital held by banks does not fall below a certain level and to adopt a more consistent approach across the industry to measuring risk.

A sign for Bank Street and high rise offices are pictured in the financial district Canary Wharf in London in this October 21, 2010 file photo. REUTERS/Luke Macgregor/Files

Regulators on the Basel Committee, which sets rules for the industry worldwide, are concerned that inconsistencies in the way big banks calculate the size of their capital buffers undermines investor confidence in their capital ratios, a key measure of lenders’ financial health.

They are also seeking to avoid any repeat of the 2007-09 financial crisis which saw under-capitalized lenders being rescued by taxpayers.

The regulators are proposing a standardized approach to assessing risk and a stricter “floor” on the capital which banks must hold.

“The Committee’s proposed floor would ensure that the level of capital across the banking system does not fall below a certain level,” it said in a statement on Monday.

However, it said it had yet to determine where that floor would be set.

The Committee also wants to standardize the methodology used by big banks to apportion risk weightings to different assets they hold. It said the proposals would reduce risks associated with banks basing their calculations on internal models, and make it easier to compare the capital strength of banks.

The measures would also reduce reliance on external credit ratings when assessing risk and instead be based on a bank’s capital strength and the quality of its assets.

The Committee is proposing a tightening of the criteria required for consumer-facing banks to qualify for preferential treatment when apportioning risk weightings to assets.

Home loans would no longer receive a 35 percent risk weighting. Instead they would be weighted based upon the size of the loan compared with the value of the property and the borrower’s level of debt.

The Committee published a consultation paper on Monday and has given banks and other interested parties until March 27 to respond.

Regulators in Britain and the United States have criticized 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.

Reporting by Matt Scuffham; Editing by Pravin Char

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