Global banking regulators proposed on Monday that banks should only have to set aside small amounts of capital when dealing with supervised central counterparties, in a consultative paper aimed at further stabilizing the financial system.

Transactions carried out via central counterparties are seen as more transparent than those made in the over-the-counter deals. There is also greater liquidity in centrally cleared markets.

The Basel Committee on Banking Supervision, however, also said in the paper that even the risk of dealing with regulated central counterparties (CCP) should not be set at zero.

The Committee's intent is to provide incentives for banks to increase the use of CCPs, Mark White, chair of the Basel Committee's Risk Management and Modeling Group, said in a statement.

This is balanced, however, by the need to ensure that the risk arising from banks' exposures to CCPs is adequately capitalized, he added.

Greater use of central counterparties was one of the goals set out by G20 leaders at their 2009 summit in Pittsburgh to reduce the risk of domino effect of large over the counter deals and to increase transparency.

The committee said that while the old Basel II framework allowed exposure to central counterparties to be zero, the committee now proposes a 2 percent risk weight for such trade exposures to highlight that business is never completely free of risk.

The risk weighting of assets is important to determine how much capital banks must set aside under the new, stricter capital requirements known as Basel III. [ID:nLDE6BF0SW]

The capital standard proposed on Monday is low enough that it should not impede efforts to push banks to use clearing-houses, said Mary Frances Monroe of the American Bankers Association.

It's definitely a positive move, she said, adding that the amount of capital a bank would potentially have to hold if it did not use these clearing-houses would likely be higher under the complex risk rules governing the process.

The 2 percent risk weight compares to significantly higher capital charges associated with bank over the counter derivatives, creating incentives for banks to use CCPs wherever possible.

Banks and other industry players have until Feb 4 to comment on the proposals.

The Basel Committee said rules will be finalized once the final standards for central counterparties are published during 2011. The Committee expects the rules will be implemented in its member jurisdictions by January 2013. For the full paper click:

(Reporting by Sven Egenter in Zurich and David Clarke in Washington; Editing by Hugh Lawson)