WE HAVE BEEN TELLING YOU THIS FOR MONTHSAlistair Darling, acknowledges that the Basel-II set of rules for banks' capital ratios may need to be changed

Treasury told to relax capital rules

The Treasury is considering overhauling international banking regulations after 

being warned by some of the country's most senior bankers that they are restricting 

the amount of money they can make available for new lending.

 

By Mark Kleinman and Edmund Conway
Last Updated: 10:18PM GMT 10 Jan 2009

The Chancellor, Alistair Darling, has acknowledged that the Basel-II set of rules for banks' capital ratios may need to be changed, amid suspicions that the set of accounting rules lie at the very heart of the credit crisis.

In a letter sent to Mr Darling just before Christmas on behalf of major British banks, Stephen Green, the executive chairman of HSBC, urged the Treasury to consider whether the framework, which affects the way banks draw up their balance sheets, was impairing Government efforts to kick-start lending to British businesses. The letter was also signed by the bosses of banks including Abbey and Barclays.

The news comes with the Treasury and Bank of England poised to introduce a broad set of new measures aimed at tackling the economic crisis as soon as this week. It is putting the finishing touches to a new system of guarantees designed to encourage lending to small businesses - particularly manufacturers and exporters, through beefed-up guarantee schemes. The Bank is also set to announce the extension of the Special Liquidity Scheme, which expires at the end of this month. It is likely to expand the kind of loans accepted as collateral to securities issued in 2008 - a major departure from its previous policies.

However, the Treasury's recognition of the problems posed by the Basel rules represents a clear acknowledgement that the current system of financial regulations is due for a major shake-up.

The rules are at the centre of the debate because while the Treasury is urging banks to maintain lending to businesses at the peaks achieved during the boom-times of recent years, Basel-II requires additional capital to be held against existing loans.

The Treasury is now investigating ways to ease this pressure facing banks, amid concerns that the requirements are pro-cyclical - in other words intensifying the crisis.

"Basel is something that banks have raised with us," said a spokesman. "Although it took a long time to be implemented there are some issues around the way it may be operating.

"There may be some 
things which we need to try to change - together with the Financial Services Authority. This is something we are pursuing, but obviously it is an issue where you need international agreement."