WASHINGTON- Banks that lend intemationally may have to adjust their risk-based capital reserves under a proposal the Federal Reserve released Monday for public comment. The central bank's proposal seeks to conform the risk-based capital guidelines for country transfer risk to new rules announced by the Basel Supervisors' Committee in July. The change would affect Reg. H and Reg, Y.
The governors approved the comment period without debate.
The proposal clarifies which countries qualify for lower risk weights under the Basel Accord.
It states that any member of the Organization for Economic Cooperation and Development regardless of when it joined is eligible for the lower risk ratings, provided it hasn't restmctured its debt within the past five years.
Restmcmring is defined as renegotiating debt because a country is unable to pay. It does not include refinancing to take advantage of changing markets.
The Fed proposal states that several nations were unsure whether countries that joined the OECD after the Basel Accord was endorsed in 1988 qualify for the lower risk weights.
One aspect of the Basel Accord rewards members of the OECD with lower risk ratings than nonmembers. This makes it less expensive for financial institutions to lend to these countries.
The accord uses a sliding scale to assign risk weights. For example, direct claims on central governments and central banks have zero risk while general obligation bonds of states and other political subdivisions carry a 20% risk weight.
The public has 60 days from the date the central bank publishes the proposal in the Federal Register to comment.