Basel Committee consultation on fair value option

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15 Jul 2005

The Basel Committee on Banking Supervision has issued a consultative document Supervisory Guidance on the Use of the Fair Value Option by Banks under IFRSs that discusses supervisory guidance on banks' use of the IAS 39 fair value option.

Two key areas of supervisory guidance are addressed:
  • What constitutes a set of sound risk management and control processes around use of the option?
  • How might a bank's use of the option affect supervisory assessments of a bank's risk management systems and regulatory capital? The guidance suggests additional information that supervisors might collect to help them better understand how banks are using the fair value option and how this use impacts the supervisory assessment of banks' financial condition.
The proposal does not impose additional accounting or disclosure requirements beyond those in the June 2005 IAS 39 Fair Value Option Amendment. Under the approach proposed in the consultative document, for those banks capable of fully meeting the supervisory expectations set out in this paper, no adjustments to regulatory capital would be required as a consequence of their use of the fair value option. One exception to this general approach is the Committee's view, published in June 2004, that gains and losses arising from changes in a bank's own credit risk associated with its liabilities should not be included in a bank's regulatory capital. For banks that do not meet the supervisory expectations set forth in the consultative paper, a range of possible supervisory responses is discussed, including possible supervisory actions with respect to regulatory capital. The comment period ends 31 October 2005. Click to download:

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