WASHINGTON -- Securites regulators from 15 industrialized nations have reached an accord that marks an important step toward aligning capital standards for banks and securities firms.
The agreement outlines the amount of capital that securities firms must hold to guard agaist potential losses from foreign-exchange shifts, interest rate exposure, and other so-called market risks.
The accord will be unveiled today, Securities and Exchange Commission Chairman Richard C. Breeden said in a brief interview Wednesday.
The agreement should add some steam to international banking regulators' negotiations on measuring market risk. Those talks are being held in Switzerland by the Basel Committee on Banking Supervision, which is working under the auspices of the Bank for International Settlements.
If bank regulators agree to standards on market risk, banks and securities firms would for the first time have common capital rules.
Disagreement on Capital Rules
Each industry maintains that its capital rules are at least as tough as the other's, but because the businesses have traditionally been so different, it is hard to say who is right. Now, as the lines between the industries grow blurrier, aligning the standards is seen as a way of promoting fairer competition.
International bank regulators have already agreed to standards on credit risk. Under those rules, now being phased in, banks must maintain capital equal to 8% of the value of assets adjusted for credit risk.
Credit risk, however, is considered to be a fairly crude measure of capital adequacy. There is broad agreement among banking and securities regulators that risk-based capital calculations would yield more precise results if market-risk measures were factored in.
But the bank regulators have had trouble working up a consensus, and the market-risk proposal has dogged the Basel Committee for the past three years.
Immediate Effects Minimal
The guidelines just agreed to by securities regulators will have little immediate effect on financial institutions. Only banks that have separately capitalized broker-dealers would be governed by the standards, said Karen Shaw, president of the Institute for Strategy Development.
But if the agreemnet evolves into a new definition of capital adequacy for banks as well, "it will have a very important effect," she added.
Details of the recommendations were not available Wednesday. They will be unveiled at today's closing session of the annual convention of the International Organization of Securities Commissions. The group of regulators from 50 nations has been meeting in Washington this week.
In addition to measuring foreign-exchange and interest-rate risk, the agreement is expected to cover trading positions in debt and equities and asset concentration. It should also weigh "conglomerate risk," or the potential losses that banking and securities firms that are part of a widely diversified corporation could incur at the hands of parent or affiliate.
Some Major Disagreements
In comments to reporters last week, Mr. Breeden indicated that the securities regulators differ with their banking counterparts in some significant respects.
"There are a number of ways we believe standards for bank securities operations, particularly in the debt securities area, should be improved," Mr. Breeden said.
It is not clear whether the securities regulators' recommendations would call on firms to record the value of assets at their market, rather than historical, cost. Mr. Breeden - chairman of the securities regulators' group's technical committee, which is issuing the recommendations - is a staunch advocate of market-value accounting. The banking industry has vigorously resisted this approach.
Tha Basel Committee's long-drawn-out market risk negotiations haven't captured the interest of many U.S. banks. But new rules are likely to affect banks profoundly.