TWN Info Service on Finance and Development (Dec08/03)
5 December 2008
Third World Network

Finance: Basel Committee outlines strategy to address banking crisis
Published in SUNS #6595 dated 21 November 2008

Geneva, 20 Nov (Kanaga Raja) -- The Basel Committee on Banking Supervision (BCBS) announced on Thursday a comprehensive strategy to address the fundamental weaknesses revealed by the financial market crisis with respect to the regulation, supervision and risk management of internationally-active banks.

The Basel Committee is a forum for regular cooperation on banking supervisory matters and seeks to promote and strengthen supervisory and risk management practices around the world.

The Committee is composed of members coming from Belgium, Canada, France, Germany, Italy, Japan, Luxembourg, the Netherlands, Spain, Sweden, Switzerland, United Kingdom and the United States.

The Chairman of the Basel Committee, Mr Nout Wellink, 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."

"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," he added.

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," said Mr Wellink, who is also the President of the Netherlands Bank.

According to the Basel Committee, 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 pro-cyclicality;

-- 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 counter-party 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 Chairman noted that the 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.

Mr Wellink also emphasized 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".

On Monday, the Basel Committee Chairman delivered a keynote address at a High-Level Meeting on "the Role of Banking and Banking Supervision in Financial Stability" in Beijing, China, where he presented the Committee's strategy.

In his address in Beijing, Mr Wellink highlighted, from a supervisory perspective, several main contributing factors that came together to form what he called "a perfect storm".

These include a large amount of pre-crisis, system-wide liquidity, which led to excessive risk taking; inadequate measures to contain leverage, maturity mismatches, risk concentrations and the erosion of liquidity buffers over the credit cycle; regulatory gaps, which left important segments of the financial system under-regulated; poor incentives in regulatory frameworks; poor underwriting standards; outsourcing of the due diligence process to the rating agencies; and fundamental shortcomings in financial institution's governance, of which the current risk management shortcomings are just a symptom.

"The crisis, which has re-concentrated risk in the banking sector, has resulted in financial market stress and massive de-leveraging of historic proportions, with increasing spillover to the real economy. The speed and scale of these developments have been nothing short of astonishing," he said.

Mr Wellink further said that there is need to develop a coordinated strategy to put the banking system on a sound footing over the longer term. Such efforts will further reinforce near term confidence-building measures and provide a long term target around which national and global policy making efforts can converge.

They also will provide the basis for an exit strategy from the increased official sector engagement in the banking sector, he added.