The Basel Committee on Banking Supervision at the Bank for International Settlements (BIS) has announced plans to address the fundamental weaknesses revealed by the financial market crisis related to the regulation, supervision and risk management of internationally-active banks.
Nout Wellink, chairman of the Basel Committee said that "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."
He added that "the primary objective of the committee's strategy is to strengthen capital buffers and help contain leverage in the banking system arising from both on- and off-balance sheet activities." It will also promote stronger risk management and governance practices to limit risk concentrations at banks.
"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," Wellink said.
In its statement, the committee said that the key building blocks of its strategy are:
- Strengthening the risk capture of the Basel II framework (in particular 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 and dampen procyclicality;
- Evaluating the need to supplement risk-based measures with simple gross measures of exposure in both prudential and risk management frameworks to help contain leverage in the banking system;
- Strengthening supervisory frameworks to assess 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.
The Basel Committee expects to issue proposals on a number of these topics for public consultation in early 2009, focusing on the April 2008 recommendations of the Financial Stability Forum. The other topics will be addressed over the course of 2009.
Wellink emphasised that the committee's efforts will be "carried out as part of a considered process that balances the objective of maintaining a vibrant, competitive banking sector in good times against the need to enhance the sector's resilience in future periods of financial and economic stress".