June 8, 2015 / 10:04 AM / 4 years ago

UPDATE 2-Basel watchdog proposes bank capital rule to cover interest rate risks

* Two proposals put forward for public consultation

* One is mandatory surcharge, other set by local supervisors

* Public consultation ends in September (Adds banker comment, more detail)

By Huw Jones

June 8 (Reuters) - Global banking regulators are proposing two alternatives for forcing banks to set aside far more money to cover the risk of interest rate changes to their earnings and core financial cushions.

The Basel Committee, a body of banking supervisors from nearly 30 countries, published on Monday a consultation document that sets out two options: a mandatory minimum capital surcharge on banks or a surcharge set by local regulators.

After the public consultation ends in September, Basel will decide on which approach to choose and when the first detailed global bank capital rule of its kind would take effect to replace broad principles and guidelines.

The requirement to set aside money specifically to cover interest rate risks on a bank’s main book will come on top of the capital targets they have already been set by regulators in a bid to prevent a repeat of the global financial crisis.

“This is particularly important in the light of the current exceptionally low interest rate environment in many jurisdictions,” Basel said in a statement.

The Federal Reserve is expected to be the first major central bank to begin raising rates from their prolonged, low levels, a step some banks fear could create volatility in markets.

Regulators also want to reduce the incentive for banks to shift assets from their trading book to their banking book to lighten their capital charges.

There is currently no fixed global bank capital rule to cover interest rate risks and though banks do set aside capital, the amount varies from lender to lender and country to country.

Under Basel’s rule, banks would have to publish how much capital they hold to increase transparency for markets.

Simon Hills, executive director for prudential capital at the British Bankers’ Association, said different banks have different business models so a mandatory one-size-fits-all approach could be difficult to apply.

“It might also mean that all banks choose to use the same mechanism for managing interest rate risk, which is likely to reduce diversity and customer choice,” he said.

Regulators were unable to agree on a single proposal due to pockets of much higher interest rates in some countries such as China, making it harder to set a mandatory capital requirement.

Basel said that even if the so-called “Pillar II” or supervisory discretion route is ultimately taken, it would still represent a “new hybrid” rule with elements of a mandatory calculation to limit wriggle room for regulators. (Editing by Louise Heavens and Mark Potter)

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