Bank of England Studies Risks of Off-Balance-Sheet Activities

By O'Connor, James H. | American Banker, March 25, 1986 | Go to article overview

Bank of England Studies Risks of Off-Balance-Sheet Activities


O'Connor, James H., American Banker


Bank of England Studies Risks Of Off-Balance-Sheet Activities

LONDON -- The Bank of England will attempt to pinpoint the relative risks of off-balance-sheet business by consulting with banks in London and then declaring new capital adequacy requirements, probably by the end of this year.

The move, in the form of a "consultative paper" distributed last week, represents further international scrutiny of fee-generating business in which a bank does not loan funds but does take on a degree of risk.

The Federal Reserve Board and other central banks are studying this relatively new and vastly popular area of banking. The supervisory point of view is being considered by a committee of central bankers who meet at the Bank for International Settlements in Basel, Switzerland.

Though the Bank of England is the first central bank to outline a plan for implementing a capital adequacy structure for off-balance-sheet risk, an American bank officer here said the Federal Reserve Board is expected to outline a policy that "will probably be more aggressive."

The Bank of England's paper said: "In parallel with its discussions with banks in the United Kingdom, the bank has also consulted with central banks and supervisory authorities in other countries and will continue to do so." A spokesman said there have been some discussions with American banks, and "there certainly will be" more in coming months.

New Methods Needed for Some Types of Risk

The risk arising from most types of off-balance-sheet business is, in principle, no different from that associated with business recorded on the balance sheet, the paper said. "Although with some of the more recently developed instruments, new methods of estimating the potential magnitude of some types of risk exposure need to be devised."

The Bank of England sent copies of the consultative paper to all banks here last week. A spokesman said there have been some discussions with American banks, and "there certainly will be" more in coming months.

The Bank of England outline off-balance-sheet business in three categories: guarantees and other contigents, commitments, and interest rate- and exchange rate-related transactions.

In 1980, the bank allocated a risk-asset ratio weighting of 0.5 to the first category, contingents. Since then, the volume of off-balance-sheet business has grown significantly. The bank said it now feels that a number of "new instruments and facilities have been introduced which are not covoered in the current system of prudential supervision."

One major issue before the regulators is this: The difference between contingents, which represent a current exposure for the financial institution involved, and commitments, which represent future exposure, is steadily becoming a more difficult line to define. …

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