Bank to tighten up on risk rating

The Bank of England will publish far-reaching proposals today to improve its supervision of British banks following recent scandals such as the collapse of Barings. The consultative paper proposes a much more interventionist and formal approach to rating risk inside banks, backed by the threat of increased capital adequacy ratios for banks that fail to comply.

The move comes hard on the heels of the Bank's warning that the bonus culture in investment banks is tempting dealers to take greater risks.

The proposals have taken a year to prepare and are based on a concept called the Rate framework. This will include a new formal risk assessment for most banks, which will be prepared on an annual basis and will concentrate on identifying which area of each bank is most at risk. In this way the Bank hopes to concentrate its supervisory resources most effectively.

Michael Foot, the successor to Brian Quinn as the Bank's director in charge of banking supervision, said the proposals dovetailed with what other regulators were doing. The Securities and Futures Authority (SFA) already has the ability to require errant institutions to boost their proportion of capital against liabilities.

Mr Foot said: "Regulatory cooperation has expanded enormously in the UK. The Bank co-operated closely with the SFA over the collapse of Barings. The conversion of so many building societies to bank status this year has meant we have had to work very closely with the Building Societies Commission and recent problems in the asset management industry have meant working alongside Imro."

Asked whether such measures would have prevented the collapse of Barings, Mr Foot said: "This system would have warned us earlier that the asset management and securities side was becoming more important [to Barings]." Mr Foot said the rising exposure at Barings' futures operation in Singapore would have set off alarm bells as early as 1993 if Rate had been in place.

A prototype of the Rate process will be tested on up to 20 UK banks this year. The Bank will then turn to the thorny issue of supervising overseas banks with operations in the UK in the summer.

Mr Foot admitted the Bank's more intrusive role was worrying a lot of banks. "They are very concerned that this might be the thin end of a very long wedge. We will be having seminars with banks on these proposals in early May. It's all part of the new glasnost."

The Rate system will assess the business risk facing a bank using five factors, collectively known as Camel: capital, assets, market risk, earnings and liabilities. Much of the system is based on research done for the Bank last year by accountants Arthur Andersen which concluded the Bank needed to take on an extra 100 staff.