Basel: Banks dealing in the complex structured credit products at the heart of the current global financial turmoil will have to set aside more capital to cover their positions, international banking regulators said on 16 April.
Outlining a series of measures to strengthen the the banking system, which has in recent months been hard-hit by the US subprime home loan crisis, the Basel Committee of banking regulators said it will also seek more thorough disclosure.
In addition, the group is reviewing if there should be more consistency in global liquidity regulation and the supervision of cross border banks.
The ongoing global markets turmoil erupted last year amid rising defaults on US subprime home loans given to people with poor credit history.
As these mortgages were further packaged into complex structured securities such as collateralized debt obligations, or CDOs, such defaults have had an immense impact across banks with substantial exposure to these instruments.
Switzerland’s largest bank UBS is so far the biggest victim of the crisis, with some $37.4 billion wiped off its books.
“Supervisors cannot predict the next crisis but they can carry forward the lessons from recent events to promote a more resilient banking system that can weather shocks, whatever the source,” said Nout Wellink, chairman of the Basel committee as well as governor of the Dutch central bank.
“The key building blocks to core bank resiliency are strong capital cushions, robust liquidity buffers, strong risk management and supervision, and better market discipline through transparency.”
The Basel committee said that it will revise the Basel II Framework -- which sets minimum capital requirements for banks as well as other measures to tighten risk management -- to establish higher capital requirements for complex structured credit products such as CDOs and other asset-backed securities.
Guidance will be issued by 2009 requiring banks to make enhanced disclosures relating to complex securitisation exposures.
Weaknessses in banks’ valuation practices will be addressed through guidance developed by the committee to assess the rigour of banks’ valuation processes.
The Basel Committee includes central bank and watchdog officials from Belgium, Britain, Canada, France, Germany, Italy, Japan, Luxembourg, the Netherlands, Spain, Sweden, Switzerland and the United States.