Global regulators beefed up rules for tackling interest-raterisk in banks' loan books, but stopped short of imposingbinding capital requirements after fierce opposition from thefinancial industry.

The Basel Committee on Banking Supervision said the risk posedby changes in interest rates is “material,” especially at a timewhen rates “may normalize from historically low levels.” Theupdated rules published on Thursday pertain to customer loans andother assets that lenders expect to hold for long periods, or tomaturity, and whose current value can vary when rates change.

Banks pilloried a proposal last year to replace the existingsupervisor-led approach with minimum capital requirements setcentrally by the Basel Committee, whose members include the U.S.Federal Reserve and the European Central Bank. The regulator “notedthe industry's feedback,” and concluded that the “heterogeneousnature” of interest-rate risk in the banking book was “moreappropriately captured” by bolstering the current system.

The new standards “reflect changes in market and supervisorypractices since the principles were first published in 2004, whichis particularly pertinent in light of the current exceptionally lowinterest rates in many jurisdictions,” the Basel Committee said.The ECB is among central banks that have pushed some rates belowzero in a bid to spur bank lending and revive inflation.

'Capital Consequences'

In setting out the new rules, the Basel Committee said banks“should also consider negative interest rate scenarios and thepossibility of asymmetrical effects of negative interest rates ontheir assets and liabilities.” It didn't go further into the issueof negative rates.

The regulator provided no estimate of the impact the rules wouldhave on total capital requirements, but Uldis Cerps, executivedirector for banking at Sweden's Finansinspektionen regulator, saidearlier this month that “irrespective of the path chosen, therewill be capital consequences for banks in respect of interest raterisk.” The FSA is a member of the Basel Committee.

The Basel Committee has said that it “will focus on notsignificantly increasing overall capital requirements” as it wrapsup work on its post-crisis bank-rule overhaul this year.

One of the main changes in the new rules is that a “stricterthreshold” is applied for identifying “outlier banks,” those that“must be considered as potentially having undue” interest rate riskin their banking books, the regulator said. The threshold has beenreduced from 20 percent of a bank's total capital to 15 percent ofTier 1 capital.

'Excessive Risk'

That will make more banks subject to supervisory scrutiny. Whena review of a bank's interest rate risk exposure “revealsinadequate management or excessive risk relative to capital,earnings, or general risk profile, supervisors must requiremitigation actions and/or additional capital,” the regulatorsaid.

The committee altered the current supervisor-led approach toinclude guidance on the “shock and stress scenarios” and modelingassumptions that banks use to measure risk. Disclosure requirementshave also been enhanced to “promote greater consistency,transparency, and comparability,” the regulator said.

An updated standardized approach to measuring interest rate riskcan also be prescribed by supervisors if they find banks' ownassessments to be insufficient.

Large, internationally active banks are expected to implementthe new standards by 2018. Supervisors can also apply them to otherfirms.

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