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Banking & Finance

Basel mulls bigger capital cushion for banks with government debt

TOKYO -- A committee setting global finance standards may ask banks holding interest rate products to boost their capital enough to compensate for the if rates spike.

     The proposal has been shepherded through the Basel Committee on Banking Supervision by the U.K. and Germany, which are concerned about a rise in rates, but Japan and the U.S. have raised strong opposition.

     Two years ago, the committee had directed a working group to craft a new rule in the capital requirements for banks to account for interest rate risks in their portfolios. It plans to announce the proposal this month, but Japan, the U.S. and southern European countries staunchly oppose a numerical requirement. The Basel committee could propose instead that each country bolster oversight based on that nation's situation, or the committee could delay the announcement and debate the issue further.

     If a single requirement is imposed across the board, banks would be pressured to meet that standard by reducing their debt holdings or raising capital. They could do this gradually if given enough time before the rule is enforced, but leaving too little time could affect government bond markets. Should banks sell off government debt, long-term rates could jump.

     Japan's opposition stems from its banks holding massive quantities of government bonds: 128 trillion yen ($1.05 trillion) worth in January. Though this is down roughly 35 trillion yen from two years earlier, thanks to the Bank of Japan's asset-buying program, Japanese government bonds still account for 13% of total assets.

     Many U.S. banks own not just Treasurys but debt from government agencies and local governments as well, making up 14% of total holdings at commercial banks.

     This figure is only around 4% in the U.K. and Germany, which are pushing for the rule. Investment banks, which do not hold large amounts of government debt, are considered unlikely to be strongly affected.

     Many commercial banks are exposed to interest rate risk. If rates rose 2 percentage points in Japan, Japanese banks would suffer total paper losses of 10 trillion yen, according to BOJ estimates from last June. Since rate risks apply not just to government bonds but also long-term mortgages with lending rates fixed for many years, homebuying by individuals could suffer as well.

(Nikkei)

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