Bank reform chief sees Basel compromise to limit pain

A top central banker and regulator said some proposals in new capital rules for banks would be eased to ensure the industry can adjust to the new standards through retained earnings and reasonable fundraisings.

Nout Wellink, chairman of the Basel Committee and a member of the European Central Bank, also said on Friday that banks had been "too profitable" in the past and a major part of the industry faced a difficult period.

Wellink, speaking at a meeting of bank lobby group the Institute of International Finance, said certain capital deductions in draft proposals on new capital and liquidity rules -- dubbed Basel III -- needed to be toned down.

"We do realize, on the basis of quoted impact studies, that we have to compromise on certain elements ... but I think we will find a very acceptable solution," Wellink said about proposals to introduce a set of deductions and exclusions from common equity to calculate capital needs.

Banks have said the way the Basel Committee proposed to change rules on how minority shareholdings count toward capital calculations and the treatment of deferred taxes were among issues they would like watered down.

Wellink said banks entered the financial crisis with too much leverage, inadequate liquidity buffers, weak risk management and inappropriate pay structures, and the new rules would raise the resilience of the system.

Deutsche Bank chief executive Josef Ackermann, who also chairs the IIF, said regulators should avoid regulatory arbitrage across financial centers by coordinating tougher capital rules for investment bank trading books.

"The implementation of Basel III trading book proposals should be simultaneous, symmetrical, and comparable across all major financial markets," he said.

Among regulatory reform proposals in the pipeline are rules to force investment banks to back risky bets with more capital as a way to avoid the bets that triggered the credit crunch.

They are due to come into force in January, but are widely expected to be delayed. Banks support the move to hold more capital for riskier assets, but want them to take effect in the United States and Europe at the same time.

The wider Basel III rules were due to be implemented by the end of 2012, but G20 finance ministers said on Saturday they were likely to phased in over a longer time than originally planned.

Regulators expect the amount of capital held against a trading book to be multiples of current requirements. The Basel Committee has estimated that trading book capital will be two to three times higher under the new rules, a shift analysts say will prompt a rethink by some banks as to whether they want to continue trading certain complex or risky assets.

[Source: By Boris Groendahl and Quentin Webb, Reuters, Vienna, 11Jun10]

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