Supervisory guidance on the use of the fair value option by banks under International Financial Reporting Standards

Note: This consultative document has been superseded by the final version of June 2006.

Background and summary

This document is intended to provide supervisors with guidance on the prudential supervision of banks' implementation of the fair value option under IAS 39 as amended on 16 June 2005. This guidance focuses on supervisors' expectations for key policy positions and sound practices for banks that the Basel Committee on Banking Supervision believes will promote sound risk management and controls and maintain the integrity of regulatory capital measures.

The guidelines and recommended practices presented here address:

1. sound risk management and control processes for banks that utilise the fair value option; and
2. the manner in which supervisors should consider the level and nature of banks' use of the fair value option when assessing the adequacy of bank risk management and regulatory capital.

In addition, the guidance also discusses supplemental information through supervisory reporting that will assist supervisors in understanding how banks are using the fair value option and its impact on their financial condition. This document builds upon the Basel Committee's 8 June 2004 press release on regulatory capital and own credit risk of liabilities, its 30 July 2004 Comments on the IASB Exposure Draft of Proposed "Amendments to IAS 39, Financial Instruments: Recognition and Measurement - The Fair Value Option", and its 15 December 2004 press release Capital Treatment of Certain Items Under IFRS. In addition, the guidance draws from relevant portions of IAS 39 and the Group of 30's report Enhancing Public Confidence in Public Reporting (December 2003).

Comments from the public on all aspects of the consultative paper are welcome by 31 October 2005. These should be addressed to the Basel Committee at the following address:

Basel Committee on Banking Supervision
Bank for International Settlements
Centralbahnplatz 2
CH-4002 Basel
Switzerland

Alternatively, comments may be sent by e-mail to baselcommittee@bis.org.