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Yesterday, the Basel Committee announced steps designed to make the banking system more resilient to financial shocks. It also repeated its confidence in Basel II as the best solution to the types of risks banks face in an increasingly market-based credit intermediation process, and stressed the importance of prompt implementation.
"A resilient banking system is central to sound financial markets and growth," said Nout Wellink, Chairman of the BCBS. "Supervisors cannot predict the next crisis but they can carry forward the lessons from recent events to promote a more resilient banking system that can weather shocks, whatever the source. The key building blocks to core bank resiliency are strong capital cushions, robust liquidity buffers, strong risk management and supervision, and better market discipline through transparency.”
Basel II changes proposed included the capital treatment of complex structured credit products, liquidity facilities to support asset-backed commercial paper (ABCP) conduits, and credit exposures held in the trading book. The proposals also included strengthening global sound practice standards for liquidity risk management and supervision (to be issued in the next few months), strengthening banks' risk management practices and supervision related to stress testing, off-balance sheet management, and valuation practices as well as improving disclosure and valuation practices.
Targeted for higher capital requirements were complex structured credit products, the resecuritisations or CDOs of asset-backed securities, which the Committee believe have produced the majority of losses during the sub-prime crisis. It will strengthen the capital treatment of liquidity facilities extended to support off-balance sheet vehicles such as ABCP conduits. The BCBS says it will publish details later this year.
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