Basel Committee on Banking Supervision announces enhancements to the Basel II capital framework

16 January 2009

The Basel Committee on Banking Supervision today issued a package of consultative documents tostrengthen 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 (eg so-called CDOs of ABS); and
  • exposures to off-balance sheet vehicles (ie 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.

In addition, the Committee is proposing enhanced disclosure requirements for securitisations and sponsorship of off-balance sheet vehicles, whichshould 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.

These proposed changes are part of the Committee's broader work programme, as set out in its 20 November 2008 press release, to strengthen in a fundamental way bank capital adequacy, risk management and supervision. In particular, this includes assessing ways to mitigate procyclicality, for example, by promoting capital buffers above the regulatory minimum that can be drawn upon during periods of stress. These efforts are in support of the April 2008 recommendations of the Financial Stability Forum and the G20's November 2008 action plan.

Mr Wellink underscored that "the Committee intends to coordinate 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 13 March 2009.

Comments on the Proposed enhancements to the Basel II framework should be submitted by 17 April 2009.

Comments can be submitted by email to: baselcommittee@bis.org. Alternatively, comments may be sent by post to the Secretariat of the Basel Committee on Banking Supervision, Bank for International Settlements, CH-4002 Basel, Switzerland.