scorecardresearch
Saturday, Jan 28, 2023
Advertisement

Curbs on banks’ exposures to customers eased

The committee, made up of banking supervisors from nearly 30 countries, published the final version of a new rule that will take effect in 2019.

Global regulators have eased a new rule limiting how much business a bank can undertake with a single customer, as they try to minimise the risk of fallout from a counterparty going bust without imposing excessive burdens on financial firms.

Regulators want to avoid the damage to financial stability an insolvency can wreak, as seen with the collapse of US bank Lehman Brothers in 2008 which led to taxpayers bailing out several lenders.

“In cases where the bank’s counterparty is another bank, large exposure limits will directly contribute towards the reduction of system-wide contagion risk,” the Basel Committee of banking regulators said in a statement on Tuesday.

The committee, made up of banking supervisors from nearly 30 countries, published the final version of a new rule that will take effect in 2019, bumping up compliance costs for banks and potentially limiting how much business they can conduct with a customer.

Subscriber Only Stories
The K Arun Prakash Interview: ‘My style is to highlight the composition a...
At international checkpoint, online system  helps vehicles cross over sea...
Experts say Adani Group stock sell-off may not affect market, but deepens...
Delhi Confidential: Lok Sabha Speaker wants MPs to learn lessons from Pad...

The existing rule leaves it to supervisors to impose a 25 per cent cap on exposures, meaning each exposure cannot be more than a quarter of the bank’s total regulatory capital holdings. The Basel committee’s final rule for all internationally active lenders, sets the same overall cap but makes it mandatory, and based on a more conservative and narrower definition of capital, known as Tier 1. Banks had feared Basel would opt for an even stricter base of core Tier 1 capital.

The committee also responded to feedback from banks and other parties to rein in some of its original plans – a common pattern in the development of new regulations.

It said a bank’s exposure to one of the world’s top 29 lenders that are deemed to be globally systemically important would be limited to 15 per cent, at the top end of the 10-15 per cent originally proposed.

Advertisement

It had aired a similar curb on the next tier of lenders, the so-called domestic systemically important banks, and on systemically important non-banks such as clearing houses, but the final rule includes no such requirement.

Banks will have to report any exposure of 10 per cent or more, though, higher than the 5 per cent initially proposed.

In a big reversal, covered bonds, or debt based on top quality home loans or other assets, will be effectively carved out of rule. The committee’s original proposal offered no special treatment to the sector, raising industry hackles.

First published on: 16-04-2014 at 01:36 IST
Next Story

FinMin red flags Adani-Gujarat govt venture for SEZ

Latest Comment
Post Comment
Read Comments
Advertisement
Advertisement
Advertisement
Advertisement
close