RBI seeks new Basel norms for emerging markets

MUMBAI, MAY 31. A spirit of flexibility, universal applicability and discretion to national supervisors ought to be preserved while finalising the new Basel capital accord, the Reserve Bank of India has said.

The proposals on the new capital adequacy framework of the Basel Committee were complex and restrict its application in emerging markets where banks continue to be the major segment in financial intermediation and would be facing challenges in adopting them fully, the RBI said here today.

Unless suitably modified, adoption of new accord in its present format would result in a significant rise in capital charge for banks, especially in emerging markets, it said. The RBI, in a release, said it is essential that the Basel Committee on banking supervision should evolve a simplified standardised approach, which could be adopted uniformly by all banks that are not internationally active. The transitional arrangements proposed in the new accord may not be sufficient for these banks.

National supervisors may, therefore, be given discretion to decide on the timeframe for implementing the accord and applying it to various banks in their jurisdiction depending on the scale and complexity of their operations, the RBI said.

The apex bank said initially the new accord should be applied to all internationally active banks. The Basel Committee should also define what constitute internationally active and significant banks to ensure uniform application across all jurisdictions.

The RBI said it was of the view that all banks with cross-border business exceeding 15 per cent of their total business may be defined as internationally active banks. Significant banks may be defined as the banks with complex structures and whose share in total assets of the domestic banking system exceeds one per cent, it added.

To moderate cross-holdings of capital, the Basel Committee may consider prescribing a material limit (10 per cent of total capital) up to which cross holdings of capital and other regulatory investments could be permitted and any excess investments above the limit would be deducted from the total capital, the apex bank said.

External credit assessment institutions should not be assigned the direct responsibility for risk assessment of banking book assets.

However, such export credit agencies that disclose publicly their risk scores, rating process and procedure and subscribe to the publicly disclosed OECD methodology and qualify for use by national supervisors may be used for assigning preferential risk weights.

The RBI said risk weighting of banks should be de-linked from the credit rating of sovereigns in which they are incorporates. Instead, preferential risk weights should be assigned on the basis of their underlying strength and creditworthiness.

On the lines of discretion provided in the case of claims on sovereigns, national supervisors may be given discretion to assign lower risk weight subject to a floor of 20 per cent to claims on all banks which are dominated in domestic currency and funded in that currency, the RBI said.

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