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Bank Supervision
Basel Committee on Banking Supervision
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Sound credit risk assessment and
valuation for loans
This paper is intended to provide banks and supervisors with
guidance on sound credit risk assessment and valuation policies and
practices for loans regardless of the accounting framework applied. As such,
the principles in this paper are intended to be consistent with those set
forth in the International Financial Reporting Standards (IFRS) applicable
to loan impairment. Specifically, the paper addresses how common data and
processes may be used for credit risk assessment, accounting and capital
adequacy purposes and highlights provisioning concepts that are consistent
in prudential and accounting frameworks. This guidance focuses on policies
and practices that the Basel Committee on Banking Supervision believes will
promote sound credit risk assessment and controls.
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Supervisory guidance on the use of the
fair value option for financial instruments by banks
Basel Committee on Banking Supervision
This document is intended to provide supervisors with guidance on the
prudential supervision of banks’ implementation of the fair value option for
financial instruments, such as under IAS 39, Financial Instruments:
Recognition and Measurement, as amended in June 2005. While this guidance
refers specifically to the fair value option in IAS 39, the Basel Committee
on Banking Supervision (Committee) recognises that similar fair value option
approaches exist or are being considered in various other accounting
regimes. The Committee believes the principles set forth in this supervisory
guidance should be generally applicable in such other regimes, although
national supervisors will need to make that determination based on the
criteria and requirements of the fair value option in their jurisdiction.
Basel Committee maintains calibration
of Basel II Framework
24 May 2006
The Basel Committee on Banking Supervision has reviewed the calibration of its
capital framework for banking organisations (International convergence of
capital measurement and capital standards: a revised framework, better known as
the Basel II Framework) and decided to maintain the current calibration (1.06
scaling factor for credit risk-weighted assets). The review was based on the
results of the fifth Quantitative Impact Study (QIS 5), and also QIS 4 carried
out in some jurisdictions.
 Implantation
and validation of approaches advanced of Basel II in Spain
Bank of Spain
Available in Spanish
With
the publication of this document, the Bank of Spain tries to present the
objectives, the criteria, the calendar and necessary the basic documentation for
the implantation of the anticipated advanced approaches in the new norm of
resources, as well as the content of the processes of validation of these
approaches that are to be carried out to effects as which they can serve as base
for the calculation of the indispensable minimum resources to an organization of
credit or group of credit organizations. The document also exposes the form in
which we understand can be developed the collaboration between the different
supervision authorities.
 Dynamic
prudential regulation: Is prompt corrective action optimal?
By: Ilhyock Shim
BIS Working Papers No 206
Prompt Corrective Action (PCA) prescribes prompt and deterministic termination
of banks with insufficient levels of book-value capital. This paper investigates
whether reliance on book-value capital is a good policy choice and if PCA is an
optimal regulatory approach. I use a variant of DeMarzo and Fishman's (2004)
dynamic model of entrepreneurial finance to model interactions between a banker
and a regulator. Under hidden choice of risk, private information on returns,
limited commitment by the banker and costly liquidation, I first characterize
the optimal incentive-feasible allocation, and then demonstrate that the optimal
allocation is implementable through the combination of a risk-based deposit
insurance premium and a book-value capital regulation with prompt and stochastic
termination/bailout rather than deterministic termination with no bailout as in
PCA. I also show that partial termnation can be used instead of stochastic
termination.
 A
risk-management perspective on recent regulatory proposals
Remarks by: Susan Schmidt Bies
Member of the Board of Governors of the US Federal Reserve System, at the
America’s Community Bankers Risk Management and Finance Forum, Naples, Florida,
10 April 2006.
As Federal Reserve Chairman Bernanke noted recently, capital, earnings, and
asset quality are improving for banks of all sizes, but particularly for
community banks. Nonperforming assets, net charge-offs, and loan-loss provisions
for community banks have been at low levels in recent years. And community banks
remain profitable. The continuing strength of this part of the financial sector
is also visible in supervisory ratings, with the number of problem community
banks at historical lows. But of course all of you know that there are still
potential risks on the horizon, and supervisors are paid to make sure that
bankers manage those risks properly to maintain the safety and soundness of the
banking system. So while the banking industry is doing well of late, we believe
there are a few recent regulatory proposals to which bankers--including
community bankers--should pay attention.
 What
are examiners looking for when they examine banks for compliance?
Remarks by: Mark W Olson
Member of the Board of Governors of the US Federal Reserve System, at the
American Bankers Association's Regulatory Compliance Conference, Orlando, 12
June 2006.
Over the last few years, legal and regulatory compliance breakdowns have
attracted increased attention across the financial industry. Fortunately, most
of you have responded to your evolving compliance risks by investing in
effective compliance-risk management programs. However, now and then,
headline-grabbing incidents of noncompliance continue to capture public
attention, especially when they involve such sensitive areas as fair lending and
the Bank Secrecy Act (BSA).
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Recommended Readings
The
international banking market
Patrick McGuire & Nikola Tarashev
BIS reporting banks’ cross-border claims continued to expand in
the fourth quarter of 2005. The expansion largely took the form of greater
intra-euro area lending, although new credit to borrowers in the United States
and Japan also contributed. Yen-denominated claims rose noticeably, in line with
a trend evident since mid-2004. The increase in yen borrowing by residents of
the United Kingdom and offshore centres suggests a growing volume of yenfunded
carry trades.
 Toward
an Effective Supervision of Partially Dollarized Banking Systems
Jorge Cayazzo, Antonio Garcia Pascual, Eva Gutierrez, and Socorro
Heysen
The paper presents a supervisory framework that addresses the
vulnerabilities of partially dollarized banking systems. The tendency to
underprice systemic liquidity risk and currencyinduced credit risk creates
vulnerabilities that need supervisory responses. The framework seeks to induce
agents to better internalize risks by implementing a risk based approach to
supervision, following the risk management guidelines of the Basel Committee,
and by establishing buffers to cover higher liquidity and solvency risks. The
paper also shows that most dollarized countries have addressed their liquidity
vulnerabilities, but few have addressed those arising from currency-induced
credit risks.
 Global
Competitiveness Index 2005–2006 AL - Executive Summary
Augusto López-Claros
The past decade and a half has been an eventful period for Latin
America. A broad-based recognition of the deleterious impact of high inflation
on growth, income distribution, and poverty has contributed to enormous progress
in bringing inflation under control.With the move by many countries in recent
years to inflation-targeting, flexible exchange rate regimes, and widening
support for central bank independence, the prospects for sustaining the gains
made on the inflation front are quite high, and this is good news.The region has
been considerably less successful in addressing a broad range of weaknesses in
management of the public finances.
 The
hemispheric growth agenda - financial and economic outlook
Speech by: Martín Redrado, President of the Central Bank of
Argentina, at the 36th Washington Conference on the Americas, "Latin America:
financial and economic outlook vis-à-vis the global challenges”, Washington DC,
3 May 2006.
Global economic and financial conditions remain favorable for the
region. Commodity prices are soaring and look sustainable for at least the next
24 months, economic growth is still high and international interest rates are at
historically low levels, despite recent hikes. During this year, global growth
has become more geographically balanced with subdued inflation in the three
largest regions of the world. Expansion projections have been revised upwards,
rising from 4.3% three months ago to 4.8%. Two-thirds of such increase is
explained by growth in three countries: Russia, China and India.
Results of the fifth quantitative
impact study (QIS 5)
Basel Committee on Banking Supervision
To
evaluate the effects of the Basel II Framework on capital levels, the Basel
Committee undertook a global fifth Quantitative Impact Study (QIS 5) in 31
countries. All G10 countries (except the US) and 19 non-G10 countries
participated in the exercise. This report summarises the results of QIS 5. The
Secretariat of the Basel Committee received data from 56 Group 1 banks located
in the G10 countries, 146 G10 Group 2 banks (including some German banks on the
basis of their QIS 4 returns), and 155 banks from other countries. Limited data
from the US QIS 4 exercise – an additional 26 institutions – were also included
where possible. The Committee appreciates the substantial efforts that banks and
national supervisors have put into this data collection exercise.
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Eventos ASBA
 High-Level
Meeting on the Implementation of Basel II and other Core Supervisory Topics in
Latin America and the Caribbean Opening
Remarks: Jaime Caruana
Chairman, Basel Committee on Banking Supervision
"Two things are
evident from the agenda. The first is that there are a large number of key
topics to discuss today and tomorrow, which demonstrates the importance and
timeliness of this meeting, which I am sure will be fruitful for all concerned.
The second is that Basel II continues to be a central and priority topic not
just for supervisors but also for the banking industry, as evidenced by the
presence here today of major banking representatives, to whom I would like to
extend a warm welcome. It is well known that the Committee has devoted a large
part of its efforts over the past few years to first developing and then
implementing the revised Capital Framework. Today, we have the opportunity to
debate different aspects relating to its implementation and application...."
Review of
the Basel Core Principles
Göran Lind
You may ask yourself
why, during a meeting on Basel II, you should devote some time to the Basel Core
Principles, often called the BCP. Actually, this fits in very nicely since the
core principles and the Basel II are closely connected. A country will not be
able to implement Basel II successfully unless it first has a high degree of
compliance with sound supervisory practices, as outlined in the core principles.
But it is also important to note that a country without any complex or
internationally active banks may have a highly efficient supervisory system
without applying Basel II provided that it complies with the core principles.
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The
strength of the Latin-American region rests on its
continuous modernization, with the purpose to support
its economic development, accompanied by social peace
for its societies. In this process the financial systems
plays an essential role.