Basel Committee Told to Address Gaps in Banking Supervision Reform

BASEL - The Basel Committee on Banking Supervision must make further progress on several areas not fully tackled in its two major consultative documents published on December 17, the Committee's oversight board of central bank governors and heads of supervision said when meeting in Basel on January 10 to review the proposals.

The board highlighted several areas requiring further work. First, it asked that the Committee produce a practical proposal for a provisioning approach based on expected credit losses, rather than incurred losses by March 2010. Although guiding principles have already been issued to help accounting standard-setters and regulators reach a common approach in the replacement of International Accounting Standard (IAS) 39, the oversight board is pushing for something more concrete.

This could put regulators on a collision course with the International Accounting Standards Board (IASB), which published proposals for consultation on November 5 to replace the incurred loss model with an expected loss model, as part of the overhaul of IAS 39. But the IASB proposals require future losses to be estimated using volatile point-in-time measures rather than the more counter-cyclical through-the-cycle estimates the Basel Committee's oversight board is pushing.

Regulators hope the introduction of a through-the-cycle approach to provisioning would address some of the widespread concerns regarding pro-cyclicality in the Basel II framework, but the oversight board also renews calls for a framework of counter-cyclical capital buffers - something the December package addressed from a high level but failed to explain in detail. Committee members have attributed the lack of progress to a split between central banks and supervisors over how the buffers would be structured.

Second, the board has called on the Basel Committee to tackle the risk posed by systemically important banks - something that was on its agenda last year but was not addressed in any detail in the consultation documents. The Committee has now created a new Macro-prudential Group with a mandate to evaluate a range of options including capital and liquidity surcharges, resolution mechanisms and structural adjustments.

Third, the board stresses the need for the Committee to review the role of contingent capital and convertible capital instruments in the regulatory capital framework and to use the quantitative impact study to review the details of its proposed minimum liquidity standards.

The board also repeated its call for the Committee to deliver a final, fully calibrated reform package by the end of 2010 with the aim of implementation by the end of 2012. To make that possible, it stressed the importance of the current period of industry consultation and quantitative testing that aims to capture the impact of the proposals on the banking sector and the broader economy.

"The group of central bank governors and heads of supervision will provide strong oversight of the work of the Basel Committee during this phase, including both the completion and calibration of the reforms," said Jean-Claude Trichet, president of the European Central Bank and chair of the oversight board.