Basel Committee out with Basel II enhancements

Proposed changes to strengthen the supervisory environment for banks

BASEL - The Basel Committee on Banking Supervision has issued a package of consultative documents to strengthen the Basel II capital framework. The enhancements are part of a broader effort by the Committee to strengthen the regulation and supervision of internationally active banks in light of weaknesses revealed by the financial markets crisis.

"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," says Nout Wellink, chairman of the Basel Committee and president of the Netherlands Bank.

The proposed changes to capital requirements cover: trading book exposures, including complex and illiquid credit products; certain complex securitisations in the banking book, such as collateralized debt obligations; and exposures to off-balance-sheet vehicles such as asset-backed commercial paper 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.

Enhanced disclosure requirements for securitisations and sponsorship of off-balance-sheet vehicles are also suggested, to help give market participants a better understanding of the overall risk profile of a financial institution.

Proposals for the capital requirements for the trading book should be implemented in December 2010 while other improvements, including those related to risk management and disclosures, says the Committee, should be introduced by the end of this year.

Wellink underscored that fact that "the Committee intends to co-ordinate and implement this work programme in a manner that strengthens financial confidence and avoids aggravating current market conditions. It will not increase required global minimum capital ratios during periods of economic and financial stress. The Committee notes that adequate capital buffers above the regulatory minimum are designed to absorb losses and support continued lending to the economy".

Comments on the revisions to the Basel II market risk framework and the guidelines for computing capital for incremental risk in the trading book should be submitted by March 13. Comments on the proposed enhancements to the Basel II framework should be submitted by April 17 to: [e-mail].