U.S., BRITAIN AGREE FURTHER BANK CAPITAL PROPOSALS

  The Bank of England and the U.S. Federal
  Reserve Board have agreed new proposals for joint standards to
  measure the risk of an array of credit exposures that do not
  show up in bank balance sheets, the Bank of England said.
      The plan, covering swaps, forward contracts and options
  involving interest or exchange rates, complements proposals
  agreed in January between the two central banks to make
  commercial banks in the U.S. And Britain subject to similar
  standards for measuring capital adequacy, the proposal said.
      It said no final decisions had been reached yet and banks
  have until April 16 to comment on the trunk proposals.
      The Bank of England and Fed said they had faced a dilemma.
      "On the one hand (we) are determined to require adequate
  capital support for potential future exposure -- on the other
  hand (we) are concerned that overly stringent capital
  requirements might unnecessarily affect the ability of U.S. And
  U.K. Banking organisations to price...Contracts competitively."
       At the basis of the new proposals lies the concept of the
  so-called credit equivalent amount - the current value of a
  currency or interest rate contract and an estimate of its
  potential change in value due to currency or interest rate
  fluctuations until the contract matures.
      In treatment similar to that agreed in January for balance
  sheet assets, the credit equivalent will be assigned one of
  five risk weights between zero and 100 pct, depending on the
  quality of the counterparty, the remaining maturity of the
  contract and on collaterals or guarantees to the contract, the
  plans showed.
      The proposal showed that collaterals and guarantees would
  not be recognised in calculating credit equivalent amounts.
      They would, however, be reflected in the assignment of risk
  weights. The only guarantees recognised are those given by U.S.
  And U.K. Governments or, in the U.S., By domestic national
  government agencies, the proposals showed.
      The paper said the proposed rules would not cover spot
  foreign exchange contracts and securities traded in futures and
  options exchanges.
      It said U.S. Regulatory authorities and the Bank of England
  were keen to encourage banks to "net" contracts -- consolidate
  multiple contracts with the same counterparty into one single
  agreement to create one single payments stream.
      It recognised that "such arrangements may in certain
  circumstances reduce credit risk and wish to encourage their
  further development and implementation," and said some of the
  current proposals may be changed to take this into account.
      The paper said the proposed rules would not cover spot
  foreign exchange contracts and securities traded in futures and
  options exchanges.
      It said U.S. Regulatory authorities and the Bank of England
  were keen to encourage banks to "net" contracts -- consolidate
  multiple contracts with the same counterparty into one single
  agreement to create one single payments stream.
      It recognised that "such arrangements may in certain
  circumstances reduce credit risk and wish to encourage their
  further development and implementation," and said some of the
  current proposals may be changed to take this into account.
  

