Basel Committee told to address gaps in reform

The Basel Committee on Banking Supervision must make further progress on several areas not fully tackled in two major consultative documents published on December 17, the committee's oversight board of central bank governors and heads of supervision said in a meeting in Basel on January 10.

First, it asked that the committee produce a practical proposal for a provisioning approach based on expected credit losses rather than incurred losses by March 2010. Although guiding principles have already been issued, the oversight board is pushing for something more concrete.

This could put regulators on a collision course with the International Accounting Standards Board (IASB). Although the standard-setter published proposals on November 5 that endorse an expected loss model, the IASB looks likely to require losses to be estimated using volatile point-in-time measures rather than the more counter-cyclical through-the-cycle estimates the oversight board is pushing (Risk December 2009, page 9 and pages 31-33).

Regulators hope a through-the-cycle approach to provisioning would address some of the widespread concerns over pro-cyclicality in the Basel II framework, but the oversight board also renews calls for a framework of counter-cyclical capital buffers - something the December package discussed but failed to provide methodology for (Risk January 2010, page 8). Committee members have attributed the lack of progress to a split between central banks and supervisors over how the buffers would be structured.

Second, the board calls on the committee to tackle the risk posed by systemically important banks - something that was not addressed in any detail in the consultation documents. The committee has now created a new macro-prudential group to evaluate a range of options including capital and liquidity surcharges, resolution mechanisms and structural adjustments.

Third, the board wants the committee to review the role of contingent capital and convertible capital instruments in the regulatory capital framework, and to use a forthcoming quantitative impact study to review the details of its proposed minimum liquidity standards.

The board also repeated its call for the committee to deliver a final, fully calibrated reform package by the end of 2010. To make that possible, it stressed the importance of the current period of industry consultation and testing that aims to capture the impact of the proposals on the banking sector and the broader economy.

"The group of central bank governors and heads of supervision will provide strong oversight of the work of the Basel Committee during this phase, including both the completion and calibration of the reforms," says Jean-Claude Trichet, chair of the oversight board and European Central Bank president.