WASHINGTON - Federal regulators on Tuesday urged financial institutions to examine the newly proposed international capital rules carefully, and to pay particular attention to whether their complexity and regulatory burden would outweigh the benefits of their increased risk sensitivity.

The new rules, proposed by the Basel Committee on Banking Supervision on Jan. 16, would replace capital regulations that have been in place since 1988. The proposal would create three methods of setting regulatory capital. One would base banks' capital requirements solely on outside assessments of borrowers' creditworthiness. The other two would give a role to banks' internal risk-rating systems.

In a paper issued jointly on Tuesday, the Federal Reserve Board, the Office of the Comptroller of the Currency, and the Federal Deposit Insurance Corp. reduced the Basel Committee's proposal to a nine-page summary and offered an additional six pages of questions for banks.

In an accompanying letter to Fed-supervised banks, Richard Spillenkothen, the central bank's director of supervision and regulation, wrote: "The Basel consultative paper represents a substantial step, but additional work remains to be done before a revised framework can be applied to U.S. banking organizations.

"Given the importance of this initiative, U.S. regulators encourage interested parties to review and comment on all aspects of the Basel Committee's proposal," he wrote.

The Basel proposal, 133 pages long with several hundred pages of supporting documents, is open for public comment until May 31.

The standardized approach, which regulators expect to be used primarily by smaller banks, would require no input from the bank to determine its capital charge, which would be based on the borrower's credit rating. The other methods, known as the foundation and advanced internal ratings-based approaches, would incorporate the banks' internal risk-rating systems into the process.

Though the regulators' questions are very detailed and address almost every aspect of the proposal, they share some recurring themes, such as the concern that increased regulatory burden could erase some of the benefits of the accord, and the worry that a change in capital requirements could affect the general availability of credit.

Among other things, regulators asked banks to consider: "Do the methodologies and standards required in the proposal achieve the right balance between rigor and burden? Can banks take the steps necessary to implement approaches under the proposal in a cost-effective manner within a reasonable amount of time? What are the industry's views on the proposed implementation date of 2004, given the current state of risk measurement practices?"

In an interview with American Banker last week, Senior Deputy Comptroller Jonathan L. Fiechter expressed additional concerns about the regulators' ability to be ready for the 2004 deadline. The proposal "will put a tremendous burden on both our examiners as well the banks if we are going to get this right," he said.

But some industry observers said that for banks, implementation is no problem.

"Banks that are the best at risk management are already doing this," said Pam Martin, a spokeswoman for RMA, the trade association of bank loan and credit officers. All of the 11 banks that participate in RMA's capital group would qualify for the advanced approach, she said.

On the issue of credit accessibility, the regulators asked: "What effects, if any, are the changes in capital treatments under any of the approaches described likely to have on particular markets and/or the general availability of credit?"

Industry observers were divided on the question. Ms. Martin said she does not think the proposal would cause banks to tighten their credit requirements. "If you have a truly risk-sensitive capital regime in place, then you will be better positioned in a less favorable economic environment."

But Karen Shaw Petrou, managing director of Federal Financial Analytics, said that she believes the proposal could restrict credit. "The more I read this, the more convinced I am that the absolute amount of capital required from most banks is going to rise, and that the capital associated with certain lines of business will rise dramatically."

As a result, banks would attempt to lower their capital requirements by improving the quality of their loan portfolios, she said.

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