Prof. Jayanth R. Varma’s Financial Markets Blog

A blog on financial markets and their regulation

Basel Committee captured

The extent to which the Basel Committee on Banking Supervision has been captured by the banking industry that it regulates is clear from Guiding principles for the replacement of IAS 39 that it released today:

The new two-category approach for financial instruments should not
result in an expansion of fair value accounting, in particular through
profit and loss for institutions involved in credit
intermediation. For example, lending instruments, including loans,
should not end up in the fair value category.

There should be a strong overlay reflecting the entity’s
underlying business model as adopted by the Board of Directors and
senior management, consistent with the entity’s documented risk
management strategy and its practices, while considering the
characteristics of the instruments.

The new standard should … permit reclassifications from the fair
value to the amortised cost category; this should be allowed in rare
circumstances following the occurrence of events having clearly led to
a change in the business model

The IASB should carefully consider financial stability when
adopting the timing of the implementation of the final standard.

The new standard should provide for valuation adjustments to avoid
misstatement of both initial and subsequent profit or loss recognition
when there is significant valuation uncertainty.

The new standard should utilise approaches that draw from relevant
information in banks’ internal risk management and capital
adequacy systems when possible (eg approaches that build upon or are
otherwise consistent with loss estimation processes related to bank
internal credit grades may be useful).

Is Basel saying for example that all through this crisis they have
been quite happy with the robustness of “the underlying business
model as adopted by the Board of Directors and senior
management” of the banks as well their “documented
risk management strategy and … practices”?


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