U.S.-Britain set bank guidelines

Press, 10 January 1987, Page 29

U.S.-Britain set bank guidelines

NZPA-Reuter Washington

In a big step toward streamlining global bank regulation, U.S. and British officials have announced that they have agreed to set capital requirements for banks taking into account lending activities that did not appear on balance sheets. The proposed guidelines, approved by the Federal Reserve Board, define the minimum financial cushion banks must maintain by taking into account the riskiness of a bank’s loans and other assets. U.S. banks are required to put aside at least 6 per cent of their assets as a cushion. The Federal staff said the new guidelines, which would require reserves for off-bal-ance sheet activities, could raise requirements as high as 11 per cent. Off-balance sheet activities, such as standby letters of credit and loan commitments, can be risky but are not included when regulators assess banks’ minimum requirements. Federal officials said the proposed guidelines would not affect the majority of middle-sized U.S. banks, but could boost the capital requirements for about 25, and possibly as many as 50, of the top U.S. banks. "This will be significant for the internationally active banks that tend to have a lot of off-balance sheet items,” Federal chairman, Mr Paul Volcker, said as the board voted in favour of the proposal. Federal bank regulators, concerned about the growth of these activities, last year proposed a risk-based standard that would take off-bal-ance sheet activities into account. The plan announced this week outlines five broad categories of risk for different bank activities. American bankers have

strongly objected to the concept of risk-based capital standards, arguing they would distort investment decisions and put them at an additional disadvantage in international markets. But Mr Volcker said the plan would not put them at a disadvantage because banks in other nations have similar regulatory requirements. Similarly, British banks complained that they would not be able to compete internationally if their regulators applied capital requirements to off-balance sheet activities. The British Bankers Association said further discussions among the British banks would be needed. "These discussions will reflect concerns inevitably arising from some arbitrary oversimplifications, which are acknowledged by the authors of the paper,” said 8.8. A. chairman, Mr Denis

Child. The U.S.-British accord is the first product after two years of discussions by an international committee of bank regulators on the need to streamline banking regulation. Mr Volcker said he hoped the accord would encourage other countries to adopt similar standards so that all banks could compete fairly in international markets. “I think we will see some progress, but how rapidly remains to be seen,” he said at a news conference. The guidelines had also been approved by the other two U.S. regulatory agencies, the Office of the Comptroller of the Currency and the Federal Deposit Insurance Corp. The proposal is subject to a 90-day public comment period before it becomes final. The U.S. regulators said they had not set any deadline to implement the accord.