The RBIs view on what constitutes an internationally active bank is in response to the specific proposal of the Basel Committee that the New Accord will be applied to such players. It had been indicated in the Overview of the New Basel Capital Accord that the New Accord may be extended to include other significant banks as national supervisors deem appropriate.
It was stated by the Basel Committee that as the main objective of the New Accord is to ensure competitive equality and providing a reasonable degree of consistency in application, it is necessary that all supervisors, across the world should have a common definition of internationally active banks. Basel Committee may, therefore, define what constitute internationally active banks.
As for the cross-holding limit of 10 per cent suggested by RBI, this is in response and in appreciation of the Basel Committees proposal that reciprocal cross-holdings of bank capital artificially designed to inflate capital position of banks should be deducted. The RBI feels that cross-holdings of equity and other regulatory investments may be allowed in principle, but may also need to be moderated to preserve the integrity of the financial system and minimise the adverse effect of systemic risk and contagion.
The central bank also reiterated its earlier view that the risk weighting of banks should be de-linked from the credit rating of sovereigns in which they are incorporated. Instead, preferential risk weights should be assigned on the basis of their underlying strength and creditworthiness.
The RBI had earlier forwarded its comments on the Second Consultative Paper (CP-2) of the New Basel Capital Accord to the Basel Committee on Banking Supervision in May 2001. Several of the concerns expressed and suggestions made by India and other emerging markets on CP-2 have been taken into account and addressed in CP-3.
The RBI also felt that some of the issues relevant in the context of the emerging markets and developing countries are yet to be fully addressed; that banks in emerging markets would face serious implementation challenges due to lack of adequate technical skills, under development of financial markets, structural rigidities and less robust legal system.
The RBI has been of the view that will be desirable to assign greater flexibility to national supervisors; that there are many other areas in which national supervisors can be allowed greater flexibility in assigning a lower risk weight if the country-specific situation so warrants than following a one-size-fits-all approach based on the external ratings under the Standardised Approach.