Basel Committee outlines supervision strategy

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BRUSSELS - The Basel Committee on Banking Supervision announced a comprehensive strategy to address what it deems "fundamental weaknesses" in the regulation, supervision and risk management of internationally active banks.

The key building blocks of the Committee's strategy include working to strengthen the risk capture of the Basel II framework (in particular for trading book and off-balance-sheet exposures); enhancing the quality of Tier I capital; building additional shock absorbers into the capital framework that can be drawn upon during periods of stress and to dampen procyclicality; introducing measures 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 counterparty credit risk capital, risk management and disclosure; and promoting globally co-ordinated supervisory follow-up exercises to ensure implementation of supervisory and industry-sound principles.

Nout Wellink, chairman of the Basel Committee, says: "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 Basel Committee expects to issue proposals on a number of these topics for public consultation in early 2009.

Wellink adds: "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." It will also promote stronger risk management and governance practices to limit risk concentrations at banks. "Ultimately, our goal is to help ensure 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," he says.

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