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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.

Global sound practice standards 

At the same time, the Basel Committee for Banking Supervision said it noted 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.

There are also plans to strengthen global sound practice standards for liquidity risk management and supervision, which the Committee will issue for public consultation in the coming months.

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

Market discipline will be enhanced 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.

Better market discipline through transparency

Nout Wellink, chairman of the Basel Committee on Banking Supervision and president of the Netherlands Bank, said that a resilient banking system was central to sound financial markets and growth.

He pointed out that supervisors cannot predict the next crisis but that 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," Wellink added.

The Committee reiterated the importance of implementing the Basel II Framework, saying it better reflected the types of risks banks face in an increasingly market-based credit intermediation process.

Basel II is just now being implemented in most Basel Committee-member countries and many jurisdictions around the globe.

Higher capital requirements

The market turmoil has already provided important lessons that will help guide the Committee in further strengthening certain aspects of the Framework.

The Committee is introducing a number of measures to help ensure sufficient capital, to capture off-balance sheet exposures more effectively and to improve regulatory capital incentives.

In particular, the Committee will revise the Framework to establish higher capital requirements for certain complex structured credit products, such as so-called "resecuritisations" or CDOs of ABS, which have produced the majority of losses during the recent market turbulence.

It will strengthen the capital treatment of liquidity facilities extended to support off-balance sheet vehicles such as ABCP conduits. More detailed proposals will be published later this year.

The Committee will strengthen the capital requirements in the trading book.

Complex credit products 

Global banks' trading assets have grown at double digit rates in recent years, and in some cases represent the majority of a bank's assets.

The proportion of complex, less liquid credit products held in the trading book has likewise increased rapidly.

The current value-at-risk based treatment for assessing capital for trading book risk does not capture extraordinary events that can affect many such exposures.

The Committee, in cooperation with the International Organization of Securities Commissions (IOSCO), therefore is extending the scope of its existing proposed guidelines for "incremental default risk" to include other potential event risks in the trading book.

Until this event risk charge is in place (planned for 2010), an interim treatment will be applied for complex securitisations held in the trading book.

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