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Japanese regulator says banks should keep role in determining lending risks

[LONDON] A move by banking regulators to curb the ability of banks to assess for themselves their lending risks could backfire if as a result they lose the incentive to reduce those risks in order to cut the amount of capital they must hold as a buffer against possible defaults, a senior Japanese regulator said on Monday.

The Basel Committee of banking supervisors from nearly 30 countries is adding the finishing touches to the new rules on capital requirements introduced after the financial crisis.

This includes restrictions on the models big banks use to calculate the total amount of risky lending they hold on their books in order to determine how much core equity capital they need to hold to survive another financial crisis.

Banks say this could make lending harder as it would amount to a higher "Basel IV" capital requirement compared with the demands made under the Basel III accord introduced after the 2007-2009 crisis.

Shunsuke Shirakawa, deputy commissioner for international affairs at Japan's Financial Services Agency, said forcing lenders to use standard methods for totting up their risks could sacrifice banks' incentives to improve risk management.

It was critical to field-test Basel's new rules and make the necessary adjustments, said Mr Shirakawa, who is a member of the Basel Committee.

He also took aim at Basel's plans to impose on the world's 30 biggest banks a higher 'leverage ratio' - core equity capital as a percentage of total lending, including risk-free debt. "In finalising the design of the leverage ratio, we should bear in mind it was introduced as a supplementary measure. It should not be a main driver of capital requirements," Mr Shirakawa told the City Week conference in London.

Basel was putting too much emphasis on rulemaking and should focus more on supervision, he added.

Regulators are reviewing the welter of rules introduced since the crisis, but Benoit de Juvigny, secretary general of French markets regulator the AMF, also told the conference that many of the new rules have yet to be fully implemented and too much change would be disruptive. "It will be a mess and completely opposite to the stable regulatory environment that we need," he said.