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“The Basel Committee's work programme is well advanced and provides practical responses to the financial stability concerns raised by policy makers related to the banking sector”. So said Nout Wellink, Chairman of the Basel Committee on Banking Supervision, in a presentation on the Basel Committee's plans for changes to the New Basel Accord, Basel II.
Wellink spoke earlier this week at a conference in Beijing which focussed on the weaknesses identified by the financial market crisis which related to the Basel II remit – the regulation, supervision and risk management of internationally-active banks. He described eight changes:
- Strengthening the risk capture of the Basel II framework (especially for trading book and off-balance sheet exposures);
- Enhancing the quality of Tier 1 capital;
- Building additional shock absorbers into the capital framework that can be drawn upon during periods of stress (signs on carrying capital requirements from good years into bad ones?);
- Evaluating the need to supplement risk-based measures with simple gross measures of exposure in both prudential and risk management frameworks (allowing regulators more freedom to overrule the models?);
- Strengthening supervisory frameworks to assess the soundness of funding liquidity at cross-border banks;
- Leveraging Basel II to strengthen risk management and governance practices at banks;
- Strengthening counterparty credit risk capital, risk management and disclosure at banks; and
- Promoting globally coordinated supervisory follow-up exercises to ensure implementation of supervisory and industry sound principles.
Wellink said "the primary objective of the Committee's strategy is to strengthen capital buffers and help contain leverage in the system arising from both on- and off-balance sheet activities. It will also promote stronger risk management and governance practices and limit risk concentrations within and across banking institutions, and strengthen market transparency. Ultimately, our goal is to help ensure that the banking sector serves its traditional role as a shock absorber to the financial system, rather than an amplifier of risk between the financial sector and the real economy."
A Basel Committee press release said that they planned to issue public consultations on an unspecified number of these topics in early 2009 and to address the other topics during 2009. We will be looking at these eight areas with interest over the next months.
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