Basel Panel Tightens Risk-Capital Rule
The Basel Committee on Banking Supervision has amended risk-based capital guidelines to make it harder for banks to count loan-loss reserves as capital.
Under current rules, banks must set aside capital equal to 8% of their risk-weighted assets. General loan-loss reserves -- reserves not allocated to specific assets -- can represent about 15% of that capital.
Definition Unclear
Until now, the Basel capital guidelines have not clearly identified what sorts of specifically allocated reserves should be excluded from risk-based capital.
But an amendment adopted Tuesday calls for banks to exclude from capital any provisions or reserves specifically created against identified losses -- especially losses due to country risk or to depreciating real estate.
How the change will affect banks in different countries is not clear yet.
No Effect Expected Here
U.S. regulators said they already require U.S. banks to exclude specifically allocated reserves from their capital. "We think this will have no effect on U.S. banks' capital ratios," said one.
American banks report their general loan-loss reserves as a line item on call reports. And they report allocated transfer risk reserves -- reserves required by ICERC, an interagency committee assessing country risk -- on a separate line.
Regulators already make U.S. banks exclude those allocated reserves from their capital ratios.
Some banking industry experts have felt that doesn't go far enough. To the extent any bank has earmarked reserves for specific problems, even beyond those allocations specifically required by ICERC or other regulators, they should exclude those reserves from any capital computation, these experts said.
Allocation Disclaimer
Many big U.S. banks include explanations of their planned allocation of reserves in footnotes to their financial statements -- although such disclosures are usually accompanied by a disclaimer calling the allocation nonbinding.
"If a bank has added to its loan-loss reserves because it has a concern about a particular asset or group of assets, it shouldn't include those in capital," said a senior official at the Basel Committee.
"There has always been a semantic issue about what's general and what's specific," said Raphael Soifer, an analyst at Brown Brothers Harriman & Co. in New York.
"In practice, the amount of reserves banks have allocated to [lesser-developed-country] loans has been a notoriously moving number," he said.
Mr. Soifer added that the ruling "could force U.S. regulators to have to come up with guidelines on how much they consider to be general and how much allocated."
Banks whose governments adopt the new standard will have until the end of 1993 to comply.
