The Basel Committee on Banking Supervision on Friday issued a consultation paper that offers guidance to banks and banking supervisors to strengthen valuation processes for financial instruments.

The main principles in the guidance include:

> strong governance processes;

> use of reliable inputs and diverse information sources;

> independent verification and validation processes;

> communication of valuation uncertainty to internal and external stakeholders;

> consistency in valuation practices for risk management and reporting; and

> strong supervisory oversight around bank valuation practices.

The guidance responds to one of the key recommendations for enhancing transparency and valuation set out in the report from the Financial Stability Forum that was published back in April.

Nout Wellink, chairman of the Basel Committee and president of the Netherlands Bank, noted that this work “is part of a broader effort by the committee to strengthen firm-wide risk management practices. This guidance will help supervisors assess the rigour of banks’ valuation processes and promote improvements in risk management and control practices.”

Comments on the paper are due by Feb. 6, 2009.

IE