April 21, 2016 / 1:06 PM / 4 years ago

Regulators take softer line on banks' interest rate risk

LONDON (Reuters) - Global regulators have dropped plans to force banks to set aside money to cover potential losses if interest rates rise from their historic lows, marking the latest sign that policymakers are adopting a softer stance towards banks.

A picture illustration of crumpled kuna, Dollar and euro banknotes, taken in Zagreb January 18, 2011. REUTERS/Nikola Solic

The Basel Committee, which has banking supervisors from nearly 30 countries, published on Thursday rules to overhaul how banks set aside capital to cover the impact of rate rises on assets they hold such as loans.

Draft rules last year proposed two options, a new mandatory capital requirement or stricter disclosure.

In March, Reuters reported that the regulators had scrapped the mandatory capital requirement, opting instead for a supervisor-led approach.

Banks had fought against the fixed capital charge and the Basel Committee said it noted the industry’s feedback on the feasibility and complexities of a one-size-fits-all approach.

“Nonetheless, the committee considers the interest rate risk in the banking book to be material, particularly at a time when interest rates may normalize from historically low levels,” the committee said in a statement.

The Group of 20 economies, which includes Basel members, has said that capital requirements must not rise significantly from levels set out in the Basel III accord agreed during the 2007-09 financial crisis.

But banks have accused Basel of pushing through a “Basel IV” by the back door under later reforms.

Under its latest plans, the Basel committee will allow big banks to continue using their own models for calculating interest rate risk.

But regulators could demand fixed rules for the banks’ models if they thought they were inadequate.

Banks will have to conduct six stress scenarios to show investors and regulators how sudden rate rises would affect the value of assets like stocks and bonds and their net interest income.

Banks would have to publish the impact of rate rises in on their total capital in percentage terms but there is no requirement for them to publish how much capital in absolute terms they hold to cover rate risks.

The Basel Committee expects banks would volunteer these details if investment analysts ask about it.

Banks whose capital buffer is reduced by more than 15 percent under the stress tests will face tougher scrutiny. This will bring more banks under the Basel net as the current threshold is 20 percent.

The new rules replace guidance issued in 2005 and will come into effect in 2018.

Reporting by Huw Jones. Editing by Jane Merriman

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