Wellink: Banking should be 'shock absorber' for financial system

Chairman of the Basel Committee on Banking Supervision sets out the Committee's response to the financial crisis

BEIJING - During a speech at the "High-level meeting on the role of banking and banking supervision in financial stability" held in Beijing, Nout Wellink, president of the Netherlands Bank and chairman of the Basel Committee on Banking Supervision, set out the Committee's response to the global financial crisis.

Its primary mission is to strengthen capital buffers and help contain leverage, while ensuring risk management practices improve. It also aims to help promote stronger governance practices, limit risk concentration within and across banking institutions, and strengthen market transparency
Wellink set out the building blocks of the committee's strategy to achieve these aims.

These include strengthening 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, evaluating the need to supplement risk-based measures with simple gross measures of exposure in both prudential and risk management frameworks, strengthening supervisory frameworks to assess the soundness of 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 at banks, and promoting globally co-ordinated supervisory follow-up exercises to ensure implementation of supervisory and industry sound principles.

Wellink said: "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 also stated the Basel Committee expects to issue proposals on a several of these topics for public consultation in early 2009.
Click here for the full speech http://www.bis.org/review/r081117a.pdf