Regulators Weigh Best Way to Curb Interest Rate Risk
By John Heltman
WASHINGTON — The Basel Committee on Banking Supervision issued a proposal Monday laying out two options to deal with the growing potential threat from interest rate risk in the banking sector, with one entailing new minimum capital requirements and the other establishing strong supervisory benchmarks. Karen Shaw Petrou, managing partner at Federal Financial Analytics, said that regulators in the European Union are pushing for the capital-based framework for interest rate risk because it would bring banking rules more in line with existing capital rules on other activities like trading. A uniform capital charge would also provide an opportunity to apply some measure of risk-weighting to sovereign and other low-risk assets, which banks are holding in vast reserves. The U.S., meanwhile, addresses some of this risk with its leverage-based capital rules, which is spurring it to favor a more prudential approach, she said — requiring banks to not engage in lending that exceeds some standard ratio between interest rates paid versus interest rates received. “This is an area where the appropriate response really varies depending on which country you’re in,” Petrou said. “The U.S. has been on one side and the U.K. and E.U. and others on the other in terms of what they want to do, and that’s why they have two options in this proposal, because they simply could not agree.”