Academic

The Basel Committee is composed of the wealthy central banks; its crowning achievement is a capital adequacy accord that set the ground rules for capital reserve requirements, which in recent years, have delegated a great deal of the evaluation of the riskiness of assets to the banks themselves.  Since banks failed to apprehend how risky some of their assets were, the next round of revisions to the accord seem likely take some of that self regulation away from the banks.

Today the committee asked for comment on its proposed reevaluation of all the assets you'd expect:

• trading book exposures, including complex and illiquid credit products;
• certain complex securitisations in the banking book (eg so-called CDOs of ABS); and
• exposures to off-balance sheet vehicles (ie asset-backed commercial paper conduits).

The goals are:

The Committee is also proposing standards to promote more rigorous supervision and risk management of risk concentrations, off-balance sheet exposures, securitisations and related reputation risks. Through the supervisory review process, the Committee is promoting improvements to valuations of financial instruments, the management of funding liquidity risks and firm-wide stress testing practices.

In addition, the Committee is proposing enhanced disclosure requirements for securitisations and sponsorship of off-balance sheet vehicles, which should provide market participants with a better understanding of an institution's overall risk profile.

The Committee proposes that the capital requirements for the trading book be implemented in December 2010 while the other improvements, including those related to risk management and disclosures, be introduced by the end of 2009.