New Basle Rules For Globally Active Banks, Says Rbi

In extending its full commitment to implement the best international practices, the Reserve Bank of India (RBI) has reiterated that the New Basle Capital Accord will be applied to internationally active banks.

In this regard, the said all banks with cross-border business exceeding say 20 per cent or 25 per cent of their total business may be defined as internationally active banks.

The proposals have been forwarded keeping in view the complexity and sophistication essential for banks for implementing the New Capital Accord restricts its universal application in the emerging markets.

Banks in these emerging markets form a significant segment in financial intermediation and are likely to find implementation of the New Capital Accord a major challenge in the medium term.

 

As far as the cross holding of capital is concerned , RBI is of the view that while reciprocal cross-holdings of bank capital artificially designed to inflate capital position of banks should be deducted, it also feels that cross-holdings of equity and other regulatory investments may be allowed in principle, but may also need to be moderated to preserve the integrity of the financial system and minimise the adverse effect of systemic risk and contagion.

In this regard, RBI feels that the Basel Committee may consider prescribing a material limit (10 per cent of the total capital) up to which cross-holdings of capital and other regulatory investments could be permitted and any excess investments above the limit would be deducted from total capital.

As regards to claims on sovereigns are concerned, the committee is of the view that ratings of thise Export Credit Agencies (ECAs) should be eligible for use in assigning preferential risk weights which disclose publicly their risk scores, rating process and procedure, subscribe to the publicly disclosed OECD methodology, and are recognised by national supervisors.

On the issue of the claims on banks , the RBI has reiterated its earlier view that the risk weighting of banks should be de-linked from the credit rating of sovereigns in which they are incorporated.

Instead, preferential risk weights should be assigned on the basis of their underlying strength and creditworthiness.

further it also feels that preferential risk weights should not be linked to the maturity of the claims.

In terms of claims on sovereigns, the RBI has reiterated that on the lines of discretion provided in the case of claims on sovereigns, the national supervisors may be given discretion to assign lower risk weight, to all claims on banks, which are denominated in domestic currency and funded in that currency, subject to a floor of 20 per cent.

In appreciating the Basel Committee