09 06 2015

Basel watchdog proposes bank capital rule to cover interest rate risks

Global banking regulators have proposed two options for forcing banks to hold far more capital to cover risks from rises in interest rates.

The Basel Committee, a body of banking supervisors from nearly 30 countries, published on Monday a document for public consultation that sets out two alternatives: a mandatory minimum capital surcharge on banks, and a discretionary surcharge set by supervisors.

After the public consultation ends in September, Basel will decide on which approach to chose and when the first global bank capital rule of its kind would take effect.
Basel said its review of how banks treat the impact of interest rate risks on their main banking book was aimed at making sure lenders hold enough capital to cover potential losses from exposures to changes in borrowing costs.
"This is particularly important in the light of the current exceptionally low interest rate environment in many jurisdictions," Basel said in a statement.
The Federal Reserve is expected to be the first central bank to begin raising rates from their prolonged, low levels, a step some banks fear could create volatility in markets.
There is no fixed global bank capital rule to cover interest rate risks and though banks do set aside capital, the amount varies from lender to lender and from country to country.
Under Basel's rule, banks would have to publish how much capital they hold to increase transparency for markets.
Regulators were unable to agree on a single proposal due to pockets of much higher interest rates in some countries like China, making it harder to set a mandatory capital buffer.
Basel said that even if the so-called "Pillar II" or supervisory discretion route is ultimately taken, it would still represent a "new hybrid" rule with elements of a mandatory calculation to limit wriggle room for regulators.