The Basel Committee has announced a series of steps to help make the banking system more resilient to financial shocks. These include:

* Enhancing various aspects of the Basel II Framework, including 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. At the same time, the Committee notes the importance of prompt implementation of the Basel II framework, as this will help address a number of the shortcomings identified by the financial market crisis.

* Strengthening global sound practice standards for liquidity risk management and supervision, which the Committee will issue for public consultation in the coming months.

* Initiating efforts to strengthen banks' risk management practices and supervision related to stress testing, off-balance sheet management, and valuation practices, among others.

* Enhancing market discipline through better disclosure and valuation practices.

These measures will be introduced in a manner that promotes long-term bank resiliency and strong supervision, while seeking to avoid potentially adverse near-term impacts as the re-pricing of risk and deleveraging process continues in financial markets. The Committee's actions also are in support of the Financial Stability Forum's Working Group on Market and Institutional Resilience, which recently released its report to the G7 Finance Ministers and Central Bank Governors.

"A resilient banking system is central to sound financial markets and growth," stated Nout Wellink, Chairman of the Basel Committee on Banking Supervision and President of the Netherlands Bank. "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."

Risk management practices
The market turmoil has revealed significant risk management weaknesses at banking institutions says the Committee. Pillar 2 (the supervisory review process) provides supervisors with additional tools to assess banks' risk management and internal capital management processes. The Committee will issue Pillar 2 guidance in a number of areas to help strengthen risk management and supervisory practices. These relate to the management of firm-wide risks; banks' stress testing practices and capital planning processes; the management of off-balance sheet exposures and associated reputational risks; risk management practices relating to securitisation activities; and supervisory assessment of banks' valuation practices.

•Date: 24th April 2008• Region: World •Type: Article •Topic: Financial sector
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