The Basel Committee on Banking Supervision has issued a package of consultative documents to strengthen the Basel II capital framework. These enhancements are part of a broader effort the Committee has undertaken to strengthen the regulation and supervision of internationally active banks in light of weaknesses revealed by the financial markets crisis. Nout Wellink, chairman of the Basel Committee and president of the Netherlands Bank, said that “the proposed enhancements will help ensure that the risks inherent in banks’ portfolios related to trading activities, securitisations and exposures to off-balance sheet vehicles are better reflected in minimum capital requirements, risk management practices and accompanying disclosures to the public.” The proposed changes to capital requirements cover:
- Trading book exposures, including complex and illiquid credit products.
- Certain complex securitisations in the banking book (e.g. so-called collateralised debt obligations (CDOs) of asset-backed securities (ABS))
- Exposures to off-balance sheet vehicles (ie asset-backed commercial paper (ABCP) conduits).
The Committee is also proposing standards to promote more rigorous supervision and risk management of risk concentrations, off-balance sheet exposures, securitisations and related reputation risks. Through the supervisory review process, the Committee is promoting improvements to valuations of financial instruments, the management of funding liquidity risks and firm-wide stress testing practices.
In addition, the Committee is proposing enhanced disclosure requirements for securitisations and sponsorship of off-balance sheet vehicles, which should provide market participants with a better understanding of an institution’s overall risk profile.
The Committee proposes that the capital requirements for the trading book be implemented in December 2010 while the other improvements, including those related to risk management and disclosures, be introduced by the end of 2009.
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