A committee under the auspices of the Bank for International Settlements on Thursday unveiled a draft proposal to change the method it uses to calculate banks' capital adequacy ratios.

The Basel Committee on Banking Supervision sets the capital adequacy ratio for banks operating internationally at 8 percent. While it will keep that minimum requirement intact, it is considering adopting one of two new calculation methods that would more accurately reflect the risks banks face.

Capital adequacy ratios, required of banks in more than 100 countries, are considered the benchmark for measuring a bank's soundness.

But according to the Bank of Japan, the current method of calculating the ratio — capital divided by risk assets — has many flaws, such as not accurately reflecting the risks of corporations that banks sell loans to.

Under the current standards, banks' outstanding loans to corporations are all considered risk assets, forcing banks operating internationally to aside capital equal to 8 percent of these loans.

But the new methods being considered by the BIS would allow banks to weight their risk assets depending on the likelihood of default before calculating the ratio.

The BIS is considering two approaches.

In one, ratings by private ratings companies, such as Moody's Investors Service Inc. and Standard & Poor's Corp., would be taken into account.

Under this scheme, the committee proposes that 20 percent of the outstanding loans to corporations with top grades — such as AAA to AA- in S&P ratings — be counted as risk assets.

But it also proposes that 150 percent of outstanding loans to firms with low ratings — those below B- — be counted as risk assets.

The risk weight for firms with no ratings would be 100 percent.

The other approach would be to use each bank's internal risk-ratings systems — if regulatory authorities determine the systems to be sophisticated enough.

The committee is soliciting public comment on its proposals until the end of March. Based on the comments, the committee will announce a revised draft by the end of that year.

It is expected to take until at least fiscal 2002 for the new capital-adequacy rules to take effect, BOJ officials said.

In Japan, regulators require banks that operate domestically to keep their capital adequacy ratios above 4 percent. In the case of Tokyo Sowa Bank, whose capital-to-asset ratio fell to 2.42 percent as of March 31, the authorities recently demanded that the bank boost its capital base.