BCBS: Enhancements to the Basel II framework of risk management, especially in securitization
15 July 2009
Pillar 2 (supervisory review process) addresses several weaknesses in banks’ risk management processes– including governance and compensation (for immediate implementation) and Pillar 3 on securitisation.
The supplemental Pillar 2 (supervisory review process) guidance addresses several notable weaknesses that have been revealed in banks’ risk management processes during the financial turmoil that began in 2007. The areas addressed include:
· firm-wide governance and risk management;
· capturing the risk of off-balance sheet exposures and securitization activities;
· managing risk concentrations;
· providing incentives for banks to better manage risk and returns over the long term; and
· sound compensation practices.
The Pillar 3 (market discipline) requirements have been strengthened in several key areas, including:
· securitization exposures in the trading book;
· sponsorship of off-balance sheet vehicles;
· re-securitization exposures; and
· pipeline and warehousing risks with regard to securitization exposures
Banks and supervisors are expected to begin implementing the Pillar 2 guidance immediately. The new Pillar 1 capital requirements and Pillar 3 disclosures should be implemented no later than 31 December 2010.
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