British banking experts have drafted a new standard form agreement which they believe will allow banks a legally watertight way of offsetting their deposits with each other, whatever the currency, if either should default.
The so-called netting agreement could also reinforce the position of London, through which a quarter of international deposits are already traded, as an international financial centre.
"What the agreement says is that if I lend you $100 million in sterling and you lend me $100 million in yen, we are even," explained one London banker closely involved with drafting the accord.
Barclays Bank intends to sign agreements to offset deposits in this way with between 30 and 40 banks which are its biggest trading partners
."I think this is a major step towards reducing the risk that pervades the market, said Ashley Dowson, Barclays' head of systemic risk management. Japanese banks are also expected to be keen to adopt the new agreement.
A big international bank might well have deposits with other banks of $50 billion or more, and some bankers estimate that one third of that could typically be netted out.
That would result in a substantial reduction in the size of a bank's balance sheet, and could save it $200 million a year on the cost of maintaining a capital cushion to cover its exposure.
Banks already use this kind of agreement to net out offsetting debts in domestic deposit markets as well as in trading of derivatives such as options.
