Financial market developments and the work of the Basel Committee

At the conclusion of its 8-9 October meeting, Nout Wellink, Chairman of the Basel Committee on Banking Supervision and President of the Netherlands Bank, noted that the Committee's ongoing initiatives help address the types of issues and risks arising from the recent financial market turbulence.

In particular, the Committee underscored the importance of implementing the Basel II capital framework, strengthening supervision and risk management practices in areas like liquidity risk, and improving the robustness of valuation practices and market transparency for complex and less liquid products.

Strengthening the capital framework

Committee members agreed that Basel II implementation will help make the capital base more relevant to banks' changing risk profiles and that the Committee will closely monitor its impact. The framework will also serve to create incentives for better risk measurement and management, including for securitisation exposures and liquidity lines for asset-backed commercial paper programmes.

The Committee also has been working to introduce new standards for banks to hold capital against the default risk associated with complex, less liquid credit products in the trading book. It agreed to seek public consultation on the proposed standards and to assess their impact on banks' capital requirements.

The Committee also emphasised the key role of Pillar 2 (the Supervisory Review Process). In this regard, the Committee is pursuing various Pillar 2 topics related to implementation.

Liquidity supervision and regulation

Earlier this year, the Committee initiated a review of jurisdictions' approaches to supervising and regulating funding liquidity risk. This work will take account of lessons learned from recent market events, including how liquidity risk is assessed by banks and supervisors under the assumption of stressed market conditions and the risks related to off-balance sheet exposures.

Bank valuation practices

Building on its June 2006 guidance on the use of the fair value option and its current work on the trading book, earlier this year the Committee launched an initiative to assess the reliability and auditability of fair value estimates, including the assessment of market liquidity in valuation methodologies.

Transparency and disclosure

Introducing Pillar 3 (Market Discipline) of Basel II will improve quantitative and qualitative information available to the market place on the risk profile of banks, including risks associated with securitisation exposures, the nature of such exposures and the risks that have been retained.

The Committee continues to assess the supervisory and risk management issues arising from recent financial market developments and, where appropriate, will consider supervisory responses that are pragmatic and proportionate.

Notes to editors:

The Basel Committee on Banking Supervision provides a forum for regular cooperation on banking supervisory matters. It seeks to promote and strengthen supervisory and risk management practices globally. The Committee's members come from Belgium, Canada, France, Germany, Italy, Japan, Luxembourg, the Netherlands, Spain, Sweden, Switzerland, United Kingdom and United States.