Basel Committee Issues Documents on Basel II and the Use of Fair Value Option

The Basel Committee on Banking Supervision met with the Core Principles Liaison Group in Krakow recently. Following the meeting the Basel Committee issued several documents. Regarding Basel II, the Committee issued guidance on the estimation of loss given default (LGD) during economic downturn conditions. In addition, the Committee reviewed the results of its joint work with the International Organization of Securities Commissions (IOSCO) on the treatment of certain trading-related exposures and double default effects under Basel II. The Committee issued a consultative paper on supervisory guidance for the use by banking organisations of the fair value option amendment issued by the IASB on 16th June 2005. Two key areas of supervisory guidance are addressed: first, what constitutes a set of sound risk management and control processes around use of the option; and, second, how a bank’s use of the option might affect supervisory assessments of a bank’s risk management systems and regulatory capital.

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