New rules governing the way banks allocate capital were put forward yesterday, raising fears of over-heating in the market for residential property loans around the world.

The Basel Committee on Banking Supervision proposed cutting the amount of capital many mortgage lenders need to allocate against loans on residential property. Ms Jane Leach, head of the UK Basel advisory group at KPMG, said: "It may encourage them to lend more and it may encourage some overlending in the market."

There are mounting concerns that many property markets are overheated, with a recent OECD report flagging the Irish, British and Dutch markets as potential bubbles.

The rules would, in many circumstances, reduce the amount of capital needed by 12½ per cent. Ms Leach said they would apply mostly to building societies and smaller lenders, but banking supervisors said the rules could also apply to larger banks.

Bigger lenders will also be able to reduce the amount of capital they must allocate on housing loans under the new rules because they will be able to tailor the amount of capital needed to match the historical risk, which for mortgages is very low.

But the rules do require bigger lenders to assume a minimal loss of 10 per cent on defaulted residential loans, which imposes a minimal capital requirement. This is because housing cycles are so long that the recent buoyant markets do not adequately reflect the likely future risk.

The rules were among measures in the third and final consultative document on the new Basel Capital Accord, known as Basel II. The accord combines precise rules, guiding principles and considerable discretion for supervisory authorities. These add to its complexity and could make ensuring equivalent treatment of banks across borders difficult.