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Central bankers OK new BIS rules on banks' capital adequacy.

BASEL, Switzerland, June 27 Kyodo

Central bankers from Japan, the United States and 11 other major economies adopted Saturday a new set of rules for computing commercial banks' capital adequacy ratios that will replace the existing global standard of the Bank for International Settlements at a meeting in Basel, Switzerland.

The new rules, known as Basel 2, require banks operating internationally to have capital equal to 8 percent of outstanding loans and other risk-weighted assets, the same level as under the exiting regulations, but Basel 2 calls for, among other things, stiffening assessment of risks involved in lending to borrowers.

A bank's capital adequacy ratio is computed by dividing its share capital, retained earnings and other capital items by the total of its risk assets, such as loans to businesses, bonds and stocks.

The current capital rules of 1988 -- Basel 1 -- assign a uniform 100 percent risk weight to loans to private companies.

But under Basel 2, which will be phased in from December 2006, risk weight will be assessed based on credit ratings assigned by private rating agencies to corporate borrowers.

Also under Basel 2, the greater loan-loss provisions a bank sets aside for a loan to a troubled company, the smaller risk weight will be assigned to such a loan, which in turn will help push up capital adequacy.

As such, the new set of rules is expected to put pressure on banks to build up loan-loss provisions to troubled corporate borrowers or motivate banks to forgo additional loans or sever credit lines to such borrowers.

In computing the size of a bank's denominator, Basel 2 also takes into accounts the risks associated with possible computer-system paralysis or illicit activities by a bank's employees.

If a bank can be deemed to have high levels of methods for controlling a range of risks including loan-loss risks, Basel 2 would allow the bank to use its in-house credit ratings, rather than outside ratings, in assessing degrees of default risks posed by its borrowers.

In Japan, the Financial Services Agency is expected to revise relevant domestic regulations in tandem with Basel 2 with an eye to applying the new norms to banks' book-closings for the year to March 31, 2007, Japanese officials said.

Basel 2, like its predecessor, was drawn up by the global watchdog on banks' capital adequacy rules, the Basel Committee on Banking Supervision at the BIS, comprising central bankers and banking regulators.
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Publication:Japan Weekly Monitor
Date:Jun 28, 2004
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