The Basel Committee on 16 April 2008, is announcing a series of steps to help make the banking system more resilient to financial shocks. These include:

• Enhancing various aspects of the Basel II Framework, including the capital treatment of complex structured credit products, liquidity facilities to support asset-backed commercial paper (ABCP) conduits, and credit exposures held in the trading book. At the same time, the Committee notes the importance of prompt implementation of the Basel II framework, as this will help address a number of the shortcomings identified by the financial market crisis.
•  Strengthening global sound practice standards for liquidity risk management and supervision, which the Committee will issue for public consultation in the coming months.
• Initiating efforts to strengthen banks' risk management practices and supervision related to stress testing, off-balance sheet management, and valuation practices, among others.
• Enhancing market discipline through better disclosure and valuation practices.

These measures will be introduced in a manner that promotes long-term bank resiliency and strong supervision, while seeking to avoid potentially adverse near-term impacts as the re-pricing of risk and deleveraging process continues in financial markets. The Committee's actions also are in support of the Financial Stability Forum's Working Group on Market and Institutional Resilience, which recently released its report to the G7 Finance Ministers and Central Bank Governors.

The Basel II Capital Framework

The Committee reiterates the importance of implementing the Basel II Framework as it better reflects the types of risks banks face in an increasingly market-based credit intermediation process. Basel II is just now being implemented in most Basel Committee-member countries and many jurisdictions around the globe.

In particular, the Committee will revise the Framework to establish higher capital requirements for certain complex structured credit products, such as so-called "resecuritisations" or CDOs of ABS, which have produced the majority of losses during the recent market turbulence. It will strengthen the capital treatment of liquidity facilities extended to support off-balance sheet vehicles such as ABCP conduits. More detailed proposals will be published later this year.

The Committee will strengthen the capital requirements in the trading book. Global banks' trading assets have grown at double digit rates in recent years, and in some cases represent the majority of a bank's assets. The proportion of complex, less liquid credit products held in the trading book has likewise increased rapidly. The current value-at-risk based treatment for assessing capital for trading book risk does not capture extraordinary events that can affect many such exposures. The Committee, in cooperation with the International Organization of Securities Commissions (IOSCO), therefore is extending the scope of its existing proposed guidelines for "incremental default risk" to include other potential event risks in the trading book. Until this event risk charge is in place (planned for 2010), an interim treatment will be applied for complex securitisations held in the trading book. The Committee expects to issue its event risk proposal for public consultation later this year, and it also will conduct a quantitative impact assessment.

Banks need to have strong liquidity cushions to weather prolonged periods of financial market stress and illiquidity. In July, the Committee will publish for consultation global sound practice standards for the management and supervision of liquidity risks. These will address many of the shortcomings witnessed in the banking sector. Among other weaknesses, these relate to stress testing practices, contingency funding plans, and management of on- and off-balance sheet activity as well as contingent commitments. The Committee will coordinate rigorous follow up by supervisors to ensure banks adhere to these fundamental principles.


The Committee will promote enhanced disclosures relating to complex securitisation exposures, ABCP conduits and the sponsorship of off-balance sheet vehicles. Disclosure is a critical element of the Basel II Framework and Pillar 3 (market discipline) provides the Committee with the necessary leverage to achieve these enhancements, as such disclosures are a prerequisite for banks' being able to use the advanced approaches under Basel II. The Committee will issue further guidance in this area by 2009.
Valuation practices

Weaknesses in banks' valuation practices and related disclosures contributed to amplifying the market dislocation. Some of these shortcomings came to light during the course of the Committee's review of valuation practices that it conducted in 2007. In addition, the Committee will develop guidance that supervisors can use to assess the rigour of banks' valuation processes and thereby promote improvements in risk management in this area. This will draw on the Committee's existing trading book and fair value option guidance and industry best practice.

16 April 2008, Basel, Switzerland


Source: BIS

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