A working party has been set up by the Bermuda Monetary Authority to deal with the proposals for the overhaul of global lending standards known as Basel II.

International bank regulators this week reached an agreement in principle on Basel II, which is attempting to make sure that banks around the world lend money prudently.

The Bermuda group will look at discussing the changes to the Island's regulations in the banking sector which will be necessary when the new rules come into effect.

The rules will become effective at the end of 2006 for the panel of central bankers and regulators from 13 countries, but will most likely not be enforced in Bermuda until 2009 or 2010.

"It is ferociously complicated," said Munro Sutherland, the BMA's superintendent of banking, trusts and investment. "It will make a much more tailored regime than Basel I which was a bit quick and dirty. It is a much more structured way of evaluating overall risk."

The new process, which has been set out by a panel of central bankers and regulators at a meeting in Basel, Switzerland, replaces a 1988 standard that banks set aside eight cents for each dollar lent with a new regime matching capital requirements with the risk profiles of different business lines.

"Its intention is to encourage banks to use more complicated risk tools and therefore lower capital requirements," said Mr. Sutherland.

But he said that it was going to be a lot of extra work for the BMA and for banks, who will have to change the way they report and many information technology systems.

"One of the good things that came out of the International Monetary Fund meetings was that it wasn't a case of junking or rejecting all of the systems we had in place, but more a case of bolting pieces on to the system," said Mr. Sutherland.

He said the banks will have to invest more money on information technology and systems to be able to derive the historical loss rates to make sure they are lending without losing too much money.

"It is all about lending more prudently," said Mr. Sutherland.

Capital requirements will be weighted differently now, he said, with elements such as reputational risk, legal risk and operational risk all being taken into account.

Many of the changes are being seen as benefiting the bigger banks and offering new challenges for smaller banks such as the ones in Bermuda.

"The intention is to encourage banks to use more complicated risk tools and therefor lower the capital requirement," said Mr. Sutherland, but he said that there were systems in place which rewarded banks by encouraging them to migrate up the ladder to assess risk.

A Bloomberg report yesterday cited a a PricewaterhouseCoopers LLP study last month which said the banks will be able to deploy capital more efficiently, boosting the economy of the European Union by as much as 12 billion euros ($14 billion) a year.

It said that in a meeting this week, Basel Committee members reached agreement on remaining issues involving the treatment of credit card debt, which affects banks such as Citigroup Inc. The panel resolved to continue work on formulas that help determine how much capital banks must hold.

The text of the new accord will be published in June, completing five years of negotiations.

Basel II sets capital requirements based on three pillars: a formula based on the internal credit ratings that banks assign to borrowers; supervisory reviews of a bank's individual risk profile and management; and increased disclosure, using market discipline as a further form of oversight.

Banks have been pouring money into software systems, building more sophisticated risk modelling tools in advance of the new regime. The investments have given momentum to regulators seeking to find agreement on the accord after years of delays.

Regulators in the US, planning to apply Basel II only to a handful of the nation's biggest banks that do business internationally, have said they plan further rounds of study before releasing their own implementing regulations.