Tighten oversight and loosen mark-to-market rules, Basel Committee says

The Basel Committee on Banking Supervision has warned supervisors to improve their supervision of banks' risk models, but has also echoed calls for a relaxation in mark-to-market accounting rules.

In a consultation paper released on November 28, the committee warned banks and supervisors to ensure that valuations were checked by a separate unit within the bank, rather than by the unit responsible for trading the positions, and said that larger risk provisions would be enforced.

But, it added, regulators should also look more closely at relaxing strict mark-to-market rules under certain circumstances, considering whether markets are sufficiently liquid, whether prices are the result of forced sales, and whether the product being valued is sufficiently similar to the product traded in the market. The proposals will be open for comment until February 6.

The committee follows the lead of other regulators and industry bodies which have hinted at loosening of mark-to-market requirements in recent weeks: in October the US Securities and Exchange Commission re-emphasised the rules on ignoring mark-to-market in illiquid markets, and the governments of the eurozone countries made similar recommendations later the same month.

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