Regulators 'set to close banking capital loophole'

25 March 2013

Regulators are planning to close a capital loophole that has been used by banks across the world to improve their capital positions, it has emerged.

The Basel Committee on Banking Supervision has announced that global bodies will make their first major move following the introduction of the Basel III regulatory reform package imminently, the Financial Times reports.

Under the terms of this rule change, banks that facilitate expensive credit default swaps to reduce their capital requirements will be subject to substantial fines.

In recent years, many lenders have taken advantage of this blindspot in regulation by purchasing credit protection on risky loans and then spreading out the premiums on these products over the course of several years.

By doing so, these banks immediately benefited from lower capital charges, even though the costs do not appear on their balance sheets until later.

This decision has been received with a mixed reaction by professionals in the industry, although Daniel Davies of BNP Exane told the news source he sees it as a "sensible piece of regulation".

By Claire Archer

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