International banking supervisors are considering raising capital requirements on loans to developing countries and hedge funds, a senior regulator said recently.

The new system would use bond ratings to determine the capital charge on loans to sovereign governments, said Stephen C. Schemering, deputy director of banking supervision at the Federal Reserve Board.

Reserves would not be required for loans to countries with the top credit ratings, such as AAA or AA-minus, he said. Credits to countries with A- plus or A-minus ratings could carry a 20% risk weighting, he said. That means the bank would hold 20% of the standard 8% capital charge, or 1.6% of the loan, as a reserve. Countries with very low credit ratings could be subject to a 150% risk weighting, which translates into a 12% capital charge, he said.

International regulators also are considering a 150% risk weighting for loans to "highly leveraged institutions not subject to regulation," Schemering said during a workshop at the Independent Bankers Association of America convention. That is how regulators typically describe hedge funds.

The 150% risk weighting also would apply to "impaired" loans, though he provided little detail on what it would take for a credit to be considered impaired.

Schemering cautioned that the proposal is a draft and significant changes could be made before its expected release next month. Yet this would be the first time international regulators ever set capital requirements above 8%.

The capital proposal also would change the treatment of loans to other banks and securities firms, Schemering said. The reserve requirement would be one risk bucket higher than the capital charge for loans to the borrowing bank’s home country government, he said.

That means a loan to a U.S. bank would be subject to a 20% risk weighting. Mortgage loans would continue to fall into the 50% risk bucket, he said. Regulators plan to continue to require the full 8% reserve on all corporate loans, though Schemering said there is some talk of discounting the required reserve for loans to AAA-rated companies.