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Basel Committee consults on capital requirements and interest rate risk

Banking regulation standards body the Basel Committee on banking supervision is consulting on plans to ensure that banks put aside enough capital to deal with the effects of a rise in interest rates. 10 Jun 2015

The proposal suggests two options: a minimum capital requirements approach, calculated using a single, uniform measure; or an approach where the capital requirement is set by local regulators, based on banks' assessment of their own exposure.

The first option would promote greater consistency, transparency and comparability, improving market confidence and a creating a level playing field, the Committee said. However, the second approach would adjust more easily to different market conditions and risk management procedures, it said.

The review is based on two objectives, the Committee said: "First, to help ensure that banks have appropriate capital to cover potential losses from exposure to changes in interest rates. This is particularly important in the light of the current exceptionally low interest rate environment in many jurisdictions."

"Second, to limit capital arbitrage between the trading book and the banking book, as well as between banking book portfolios that are subject to different accounting treatments," it said.

Frank Keating, president of the American Bankers Association, told the Financial Times that either proposal was disappointing and would confuse US banks' efforts to manage rising interest rates.

"US banks…know how to manage their own institution’s unique approach to interest rate risk better than the technicians across the sea," he told the Financial Times.

However, the Financial Times also quoted Gert Wehinger, an economist at the Organisation for Economic Co-operation and Development, who said: "It seems a sensible and timely proposal to complement the existing framework, close loopholes and raise awareness, transparency and comparability of [the] risks."

The new document expands upon and is intended to replace the Basel Committee's 2004 Principles for the management and supervision of interest rate risk, it said.

Comments on the document can be made until 11 September.