Basel Committee calls for financial market shock treatment

Basel Committee calls for financial market shock treatment

Financial regulators will push banks to overhaul risk management practices and improve liquidity cushions as part of a series of measures aimed at making the global banking system more resilient to "financial shocks" such as the credit crunch.

The Basel Committee on Banking Supervision says the market turmoil "has revealed significant risk management weaknesses at banking institutions" and as a result it will push banks to beef up risk protocols and improve procedures for valuing and disclosing assets.

The Committee - which is part of the Bank for International Settlements (BIS) - says it will also enhance 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.

In July, the Committee will publish for consultation a new set of "global sound practice standards" for the management and supervision of liquidity risks.

"These will address many of the shortcomings witnessed in the banking sector," it says.

The Committee has also launched an initiative to review the need for more consistency in global liquidity regulation and supervision of cross border banks as a way to enhance their resiliency to financial market stress.

Higher capital requirements are also on the cards for complex structured credit products, such as so-called "re-securitisations" or CDOs of ABS, which have caused the majority of losses during the credit crunch.

Commenting on the new measures, Nout Wellink, chairman of the Committee and president of the Netherlands Bank, says: "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."

The BIS is also calling for prompt implementation of the Basel II framework "as this will help address a number of the shortcomings identified by the financial market crisis".

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