Overview of comments received
Supervisory guidance on the use of the fair value option for financial instruments by banks
This guidance was released in 2005 as a consultative paper, and the Basel Committee received 20, generally favourable, comment letters on the draft. Comments came from banking organisations, supervisory authorities, industry groups and audit firms. Clarifying language has been added to the guidance paper in some areas, for example:
- The revised guidance explicitly maintains a balanced position regarding a bank's choice of either hedge accounting or the fair value option and acknowledges that supervisors recognise that banks plan to use the fair value option to reduce earnings volatility.
- The paper specifies that supervisors should expect banks to maintain reasonable processes and procedures for risk management and levels of documentation, and not require excessive processes, procedures, and supporting documentation. Additionally, the guidance should not impose undue burden on institutions.
- New text advises supervisors and banks that banks should apply the appropriate risk-based capital treatment to assets designated as at fair value through profit and loss in accordance with the Committee's July 2005 trading book guidance. The fact that a financial instrument - which would otherwise receive banking book treatment for regulatory capital purposes - is designated for accounting purposes as at "fair value through profit and loss" does not change the banking book treatment for regulatory capital.
- Concepts from the previous Principle 5, which addressed banks' internal due diligence procedures with respect to customers' uses of the fair value option, have been integrated into Principle 2, which discusses supervisory expectations for sound risk management practices by banks using the fair value option.