Central bankers release first steps to tighten bank supervision

July 15, 2009

, GENEVA, Jul 15 – The world\’s biggest central banking body has released a first set of revised "Basel II" measures requiring some boosting of capital to remedy banking flaws which were exposed by the financial crisis.

The measures finalised by the Basel Committee on Banking Supervision should come into force by the end of 2010, the Bank for International Settlements said in a statement.

The committee last week approved the package requiring banks to make more detailed disclosures of their exposure to complex products such as asset-backed securities, thereby giving more and better information on the degree of risk they were taking.

In addition, they would have to adhere to strengthened minimum capital requirements which would cover exposures to complex financial products and illiquid assets that were blamed for helping to generate the collapse in credit and financial markets last year.

A draft of the measures was first unveiled in January by the BIS-based supervisory body composed of central bankers from more than 26 countries.

The Basel committee meeting last week also decided to begin work on practical measures to ensure "sound compensation" structures for staff at banks, following the uproar last year over bonus payments to bankers.

However, the central bankers are still working on broader new standards to improve the quality of overall capital requirements for commercial banks and oblige them to build permanent buffers that can be used during periods of financial turmoil.

The BIS said the Committee would try to mitigate the cyclical nature of the minimum capital requirements and to get banks to take a "forward-looking" approach to building their provisions.

The Basel Committee is aiming to release first "consultative" proposals on this broader programme by the first quarter of 2010.

Capital requirements determine the secure foundations that underpin a bank\’s business and deposits.

Adequate capital reserves can help avoid sudden collapses like those that occurred last September, precipitating the financial crisis and massive state support packages for big banks in several major economies.

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