Overview - Enhancements to the Basel II Framework, including the capital regime for trading book positions
The Basel II capital framework remains a top priority for the Basel Committee, both in terms of maintaining its effectiveness and its implementation. Once implemented, Basel II provides comprehensive tools for banks and bank supervisors to better capture and assess an increasing set of complex risks. Basel II addresses many of the risks that were not captured under Basel I and helps reduce a number of the perverse incentives that contributed to the crisis. It provides incentives for institutions to improve their governance, risk management and the measurement and aggregation of firm-wide risks.
The three pillars of Basel II will help ensure that capital regulation is better positioned to handle periods of rapid innovation and the resulting new products. In designing Basel II, the Committee intended for it to be a "living framework." With that in mind and as part of its strategic response to address weaknesses revealed by the financial market crisis, the Committee has reviewed Basel II and has developed a series of proposed enhancements to strengthen the framework. It is publishing this consultative package for comment.
- The consultative papers Revisions to the Basel II market risk framework and Guidelines for computing capital for incremental risk in the trading book set out the Committee's proposed enhancements to the regulatory capital treatment for trading book exposures. Collectively, these are referred to as the "trading book proposals".
- The Committee is also publishing the consultative document Proposed enhancements to the Basel II framework, which covers the Committee's proposals to strengthen Pillar 1 (minimum capital requirements - in addition to those covered under the trading book proposals), Pillar 2 (supervisory review process) and Pillar 3 (market discipline).
Implementation of the proposals
The Committee proposes that the risk management enhancements set out in Pillar 2 become effective 1 July 2009. It further proposes that the Pillar 1 and Pillar 3 enhancements become effective by the end of 2009. Regarding the trading book proposals, the Committee proposes an implementation date of no later than 31 December 2010. This later implementation date should help ensure that firms have sufficient time to adapt to those requirements, given the significant enhancements to risk management and regulatory reporting systems that will be required.
Comments on the Committee's proposed enhancements
Over the past year, the Committee has engaged in extensive consultations with the industry and other interested parties on the trading book proposals, which in the Committee's view warrants a comment period that is shorter than the other proposed Basel II enhancements. The trading book proposals are therefore issued for comment until 13 March 2009.
The Pillar 1, Pillar 2 and Pillar 3 proposals are discussed more fully in the document Proposed enhancements to the Basel II framework. These proposals are issued for comment until 17 April 2009.
Comments can be submitted by email to: firstname.lastname@example.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.
In addition to numerous meetings between the Basel Committee's Trading Book Group, risk managers and industry associations, in July 2008 the Committee issued for consultation Guidelines for Computing Capital for Incremental Risk in the Trading Book and Proposed revisions to the Basel II market risk framework.