BASEL - The Basel Committee on Banking Supervision has come up with enhancements to the Basel II capital framework, with specific changes for the inclusion of reputational risk in Pillar II requirements.
A section on reputational risk says it can lead to "provision of implicit support" arising from operational risk events, and therefore should form part of banks' internal capital adequacy assessment requirement and stress testing for liquidity contingency plans.
Another section of the paper requires enhanced Pillar III market discipline disclosures, especially for off-balance-sheet vehicles, which so skewed risk exposures before the credit crisis.
In a lengthy Pillar II section, the paper includes enhancements to the supervisory review process, broadening its scope with an emphasis on firm, or enterprise-wide, risk management, as well as highlighting new focuses on compensation practices, stress testing, reputational risk and off-balance-sheet exposures.
The report also says risk management standards need to improve generally, to keep pace with financial innovation, in the light of previous over-reliance on credit rating agencies and risks created by off-balance-sheet innovations and the originate-to-distribute model.
Click here to read the enhancements.