July 27, 2010 11:26 AM EDT
Central banks agreed a raft of changes on Monday to ease the pain of the planned Basel III reform that will make banks hold more capital and liquidity to withstand shocks without taxpayer aid.
The modifications were agreed by the Group of Governors and Heads of Supervision, a body of central bankers and regulators from the Group of 20 and other leading countries.
It oversees the Basel Committee on Banking Supervision, which drafted Basel III last December, sparking warnings from banks that they would not be able to keep up lending to the economy while significantly beefing up capital.
No key elements of Basel III are being scrapped as regulators insist on keeping the package intact in return for the longer phase in agreed last month by the G20.
Many of the changes, such as on deferred taxes and treatment of minorities, will be welcomed by countries such as Japan, France and Germany.
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The G20 is set to endorse a finalized Basel III reform in November with implementation from the end of 2012.
The following are the key changes announced on Monday:
DEFINITION OF CAPITAL
* Basel III proposes banks must deduct all capital held in minority-owned banks, but banks said this would force them to either divest stakes or acquire full control.
* The reform will now allow "some prudent recognition of the minority interest supporting the risks of a subsidiary that is a bank." Several banks in Europe will be pleased.
DEFERRED TAX
* Greater wiggle is also being given to the treatment of deferred tax assets in bank capital so they no longer have to be fully deducted from capital. Japan has been lobbying for such a watering down.
COUNTERPARTY CREDIT RISK
* The draft rules are made less draconian after banking concerns about the impact they would have on holdings of assets like derivatives. Large banks will welcome the move.
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