By Susan Yellin

(January 16 – 15:00 ET) – Banks in Canada and elsewhere in the world will get more flexibility on the capital requirements needed to manage risks, as the international banking community moves away from the one-size-fits all approach on capital adequacy.

The latest installment of the Basel Committee on Banking Supervision much more closely relates capital requirements to risks than the international committee’s previous version in 1988, says Nick Le Pan, deputy superintendent of the Office of the Superintendent of Financial Institutions.

Le Pan released the committee’s latest proposals today as a similar package was released in New York.

The latest proposals are among “the major international banking developments that have happened in a long time,” Le Pan says.

Currently, there are only two kinds of risks measured by regulators and the banks: credit risk (for loans) and market risk, which is associated with the everyday whims of interest rates and the like for such financial instruments as futures.

While market risk, introduced only a few years ago, will stay pat under the new proposals, different options for measuring credit risks are being introduced and a third kind of risk — operational risk — is being added.

The new framework will keep both the current definition of capital and the minimum ratio of 8% of capital to risk-weighted assets.

But it will also measure different risks differently, rather than the current broad-brush approach that measures all risks at 8%, says Le Pan.

After the report’s expected implementation date in 2004, riskier portfolios will require higher capital requirements, giving banks more incentive to better manage those risks, he says.

The requirements could change depending on a business cycle, for example, and banks could report those changes every quarter.

The new proposals offer for measurement for the first time operational risk, which the committee defines as “the risk of direct or indirect loss resulting from inadequate or failed internal processes, people and systems, or from external events.”

The latest Basil report is not expected to lead to higher capital requirements for banks, which should mean costs to consumers will not be affected, says Le Pan.

The deadline for comment on the new accord is May 31.

While the original Basil Accord was developed for G10 countries in 1988, Le Pan says it has become an international standard.