The Basel Committee on Banking Supervision stressed the importance of implementing the new capital adequacy framework for global banks, known as Basel II, to address systemic risks such as the recent global credit crunch.

At the conclusion of its October meeting, Nout Wellink, chairman of the Basel Committee on Banking Supervision and president of the Netherlands Bank, noted the importance of implementing the Basel II capital framework, strengthening supervision and risk management practices in areas like liquidity risk, and improving the robustness of valuation practices and market transparency for complex and less liquid products.

Committee members agreed that Basel II implementation will help make the capital base more relevant to banks’ changing risk profiles and that the committee will closely monitor its impact. The framework will also create incentives for better risk measurement and management, including for securitisation exposures and liquidity lines for asset-backed commercial paper programmes.

The committee also has been working to introduce new standards for banks to hold capital against the default risk associated with complex, less liquid credit products in the trading book. It agreed to seek public consultation on the proposed standards and to assess their impact on banks’ capital requirements.

Additionally, the committee emphasized the key role of the supervisory review process. Earlier this year, it initiated a review of jurisdictions’ approaches to supervising and regulating funding liquidity risk. This work will take account of lessons learned from recent market events, including how liquidity risk is assessed by banks and supervisors under the assumption of stressed market conditions and the risks related to off-balance sheet exposures, it said. It has also launched an initiative to assess the reliability and auditability of fair value estimates, including the assessment of market liquidity in valuation methodologies.

The committee also noted that introducing the market discipline component of Basel II will improve quantitative and qualitative information available to the market place on the risk profile of banks, including risks associated with securitization exposures, the nature of such exposures and the risks that have been retained.

It said it continues to assess the supervisory and risk management issues arising from recent financial market developments and, where appropriate, will consider supervisory responses that are pragmatic and proportionate.