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The new Basel Accord, like the 1988 landmark Basel Accord it will replace, sets the framework for how banks set aside capital to cover all aspects of their businesses. The latest version was presented along with hundreds of pages of explanatory text at a media briefing at the Federal Reserve Bank of New York.
The proposed changes, which will take a number of years to enact, foresee letting some banks use their own ratings to assess borrower risk. The latest effort is the biggest acknowledgment by regulators to date that rigid rules like those embodied in the original 1988 Accord no longer work.
Since the 1988 Accord was drafted, "there has been a veritable revolution in information technology and financial innovation" which created a clear need for a more flexible, and a more risk-sensitive Basel Accord, New York Fed President William McDonough told reporters.
McDonough also chairs the Basel Committee.
The changes, which must still be finalised and approved, are a radical departure from the old Accord, drawn up to address emerging market lending risks in the 1980s. That old Accord, once drawn up just for banks in the 10 major industrial countries, is enforced today in over 100 countries.
The new Accord aims to keep the same amount of capital in the system as the old one, even though it could mean higher or lower capital levels individual banks must set aside.
"The Committee's primary goal is to deliver a more-risk sensitive methodology that, on average, neither raises nor lowers aggregate regulatory capital," McDonough told reporters at a news conference. The new Accord "essentially rewards people who are good bankers", he added.
The changes aim to bring regulatory standards into line with real risks and to encourage banks to take more responsibility for overseeing themselves.
The Committee began the revisions in 1998 after markets were shaken by the Asian financial crisis, and after the spectacular near-failure of US hedge fund Long-Term Capital Management (LTCM).
McDonough called banking "the key institution in a market economy," and noted countries which weathered the Asian crisis best had the strongest banking systems.
"In those countries - Singapore (and) Hong Kong come to mind - where the banking system was strong, and where banking supervision was strong, they were able to manage the external shocks very well," McDonough said.
The new Accord will also require banks to furnish other banks and the public with more information.
McDonough said the more people can "understand the real risks of the institutions in which they are investing, the more they will be able to make a reasoned judgment on how to value the stock" of a bank.
The group of experts from the United States, Japan, and major European countries who comprise the Committee aim to complete the new Accord by the end of 2001.
McDonough will also stay on past when his normal term would end as head of the Committee named for the Swiss town where it is headquartered within the Bank for International Settlements (BIS).
McDonough has been cast as both gadfly and catalyst in the revision process which left some Europeans, notably Germans, complaining things were moving too fast.
The Committee has rejected any further delays.
As the pace of growth in the US economy slows and credit quality among some borrowers deteriorates, supervisors have no assurance there isn't another crisis waiting in the wings.
And on Tuesday they said it would take until 2004 until the new rules can be implemented in various national regimes.
The changes reflect a new mindset among regulators.
One of the biggest differences will be to allow some banks to use their own internal ratings to set regulatory capital, a departure from the old rules which set out a standard formula with a maximum capital charge of 8% which could apply to any corporate loan, be it to a "AAA" borrower or a high-risk junk bond issuer.
The new rules foresee higher than the 8% charge in some cases, possibly including venture capital exposure.
On Tuesday, the Committee said it "wishes to develop more risk-sensitive approaches for equity positions held in the banking book," saying at the same time it aimed to keep banks from gaining a lower capital charge "as a consequence of holding the equity of an obligor rather than its debt."
Such loopholes existing under the original 1988 Accord may not be so easy to find under the new, varied approach, with the length of the latest package reflecting the length to which regulators aim to go to capture every nuance of risk.
The latest draft also goes beyond an earlier one published in June 1999, including allowing far more banks than originally envisaged to use internal ratings to set capital charges, is partly a concession to banks in Europe, where few corporate clients have ratings.
Banks should also have on average a slightly lower capital ratio using internal ratings than they would have under the standard approach, McDonough said.
He said such an approach would make the banking system a "better shock absorber for the world's economy, and we believe that we have to provide some incentive for banks to do that".
