Germany seeks to ease parts of Basel II capital rules

By Reuters Staff
July 1, 2009

    By Marcin Grajewski and Huw Jones
   BRUSSELS/LONDON (Reuters) – Germany wants to relax global rules on capital charges to ease writedown pressures on banks holding toxic assets, an EU document showed on Wednesday.
   European Union finance ministers meet next week and will be asked to endorse a report from their Economic and Financial Committee on how to stop rules amplifying market turmoil.
   The report, obtained by Reuters, backs a series of measures, many of which are already in the works at global and EU level.
   It will take many months for the measures to come into effect and in the meantime Germany wants a temporary easing of Basel II rules that deal with capital charges on illiquid assets.
   “Germany wishes to address in the short term the capital requirement standards which have been identified as causing pro-cyclical effects by considering the possibility of temporarily modifying capital requirements,” the document said.
   There could be a temporary cap on the maximum risk weights that determine how much capital a bank must set aside.
   So-called “mapping tables” that determine the amount of capital a bank must set aside according to the credit rating of an asset, could also be tweaked, the document said, adding that the Basel II framework would stay intact.
   Tampering with the rules in this way would likely ring alarm bells for some regulators and supervisors.
   “This smacks of forebearance. It’s an extraordinary measure,” an international supervisory official said.
   
   ACTION POINTS
   The report asks ministers to endorse several actions:
   — monitoring of system-wide or macro prudential risks.
   The move follows an agreement by EU leaders last month to the establishment of a European Systemic Risk Board.
   — introducing two types of counter-cyclical buffers at banks, one as a capital charge, the other by provisioning so that banks have reserves to tap when markets turn sour:
   The International Accounting Standards Board is studying how its rules could allow recognition of expected losses.
   Europe’s banking supervisors are working on proposals for separate counter-cyclical buffers that would be raised during good times and lowered in downturns. Such buffers should not count towards eligible regulatory capital, the report said.
   Plans by the European Commission for “simple non-risk based metrics” to limit unsustainable balance sheet growth were also noted. Regulators are working on a simple cap on leverage.
   — improvement of accounting rules: the report urges the IASB to review its IAS39 fair value or mark-to-market standard, blamed by some for forcing banks to make huge writedowns on the value of some assets hit by the credit crunch.
   The IASB has agreed to reform the standard in chunks, taking effect from the year-end.
   — creating sound remuneration schemes at banks: the report welcomes the European Commission’s plans to allow supervisors to sanction banks that pay bonuses which encourage short-termism.
   The Commission’s plans have been delayed due to a dispute over whether supervisors should be able to claw back bonuses.
   The report also suggests tougher rules for insurers.
   Where an insurance product is significantly exposed to credit risk in short-term contracts, “a separate reserve or provision, incorporating the entire business cycle, could be introduced to account for this pro-cyclical effect”.

 (Editing by Dale Hudson)

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