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Broad agreement on Basel Committee capital and liquidity reform package

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27 Jul 2010

The Group of Governors and Heads of Supervision, the oversight body of the Basel Committee on Banking Supervision, met on 26 July 2010 to review the Basel Committee's capital and liquidity reform package, reaching broad agreement on the overall design of the package.

Mr Jean-Claude Trichet, President of the European Central Bank and Chairman of the Group of Governors and Heads of Supervision, said that "the agreements reached today are a landmark achievement to strengthen banking sector resilience in a manner that reflects the key lessons of the crisis."

The proposals change the treatment of various accounting balances, including an override of local GAAP in favour of IFRSs in relation to some intangibles. Some IFRS-related extracts from the proposals follow:

Allow IFRS treatment where different from national GAAP (eg software)

A level playing field is established through an option to use IFRS in determining the level of intangible assets if national GAAP results in a wider range of assets (eg certain software assets) being classified as intangible.

Definition of the leverage ratio

For all derivatives (including credit derivatives), apply Basel II netting plus a simple measure of potential future exposure based on the standardised factors of the current exposure method. This ensures that all derivatives are converted in a consistent manner to a "loan equivalent" amount... [This] would also strengthen the treatment of derivatives relative to the purely accounting based measure (and provide a simple way of addressing differences between IFRS and GAAP).

Forward looking provisioning

While capital focuses on unexpected losses, the Committee also has developed a concrete proposal to operationalise the expected loss approach to provisioning proposed by the IASB. The Committee sent a comment letter to the IASB on 30 June 2010 in which it spelled out its proposed approach. The Committee has been in close dialogue with the IASB on this topic.

The Committee is expected to finalise the regulatory buffers before the end of this year. The Governors and Heads of Supervision agreed to finalise the calibration and phase-in arrangements at their meeting in September. Click for:

 

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