Biggest lenders must not rely on each other

THE WORLD’S biggest banks should limit their transactions with each other to protect themselves against any major customers going bust, the Basel Committee on Banking Supervision proposed yesterday.

New rules would also boost transparency in a bid to reassure depositors and other creditors that one institution’s bankruptcy should not scare them into fleeing other lenders too.

Big losses at some banks on asset-backed securities in 2008 prompted investors to withdraw funds from a wide range of lenders, exacerbating the market turmoil.

Leaders of the G20 nations called on the committee at the height of the crisis in 2009 to reinforce banking rules to make markets safer. The Basel Committee is now proposing to impose a stricter exposure limit on big banks and a requirement for more detailed reporting on exposures.

“This is to ensure that the large-exposures standard is effective and consistent for internationally active banks,” it said in a statement. “On this basis, breaches of the limit should be exceptional events, should be communicated immediately to the supervisor and should, normally, be rapidly rectified.”

The Committee added that the very biggest banks would only be allowed to conduct business with another bank of similar size up to the equivalent of 10 to 15 per cent of its core capital, well below the 25 per cent limit recommended at present.

But analysts warned the move could slow the flow of capital around the world in future.