The Basel Committee on Banking Supervision today announced a series of steps intended to help make the banking system more resilient to financial shocks.

These reforms include enhancing various aspects of the new capital adequacy framework for large, global banks, known as Basel II, including the capital treatment of complex structured credit products, liquidity facilities to support asset-backed commercial paper conduits, and credit exposures held in the trading book.

In particular, the committee will revise the framework to establish higher capital requirements for certain complex structured credit products, such as so-called “resecuritisations” or CDOs of ABS, which have produced the majority of losses during the recent market turbulence. It will strengthen the capital treatment of liquidity facilities extended to support off-balance sheet vehicles such as ABCP conduits. More detailed proposals will be published later this year.

The committee will also strengthen the capital requirements in the trading book. In cooperation with the International Organization of Securities Commissions, it is extending the scope of its existing proposed guidelines for “incremental default risk” to include other potential event risks in the trading book. Until this event risk charge is in place (planned for 2010), an interim treatment will be applied for complex securitisations held in the trading book, it notes. It expects to issue its event risk proposal for public consultation later this year.

The committee also calls for the prompt implementation of the Basel II framework, which it says will help address a number of the shortcomings identified by the financial market crisis.

It also says it will strengthen the global sound practice standards for liquidity risk management and supervision. In July, the committee will publish for consultation global sound practice standards for the management and supervision of liquidity risks. It also has launched an initiative to review the need for more consistency in global liquidity regulation and supervision of cross border banks as a way to enhance their resiliency to financial market stress.

Additionally, it is initiating efforts to strengthen banks’ risk management practices and supervision related to stress testing, off-balance sheet management, and valuation practices, among other things; and, seeking to enhance market discipline through better disclosure and valuation practices. Specifically, the committee will promote enhanced disclosures relating to complex securitisation exposures, ABCP conduits and the sponsorship of off-balance sheet vehicles, and plans to issue further guidance in this area by 2009.

“These measures will be introduced in a manner that promotes long-term bank resiliency and strong supervision, while seeking to avoid potentially adverse near-term impacts as the re-pricing of risk and deleveraging process continues in financial markets,” it says.

“A resilient banking system is central to sound financial markets and growth,” stated Nout Wellink, chairman of the Basel Committee on Banking Supervision and president of the Netherlands Bank. “Supervisors cannot predict the next crisis but they can carry forward the lessons from recent events to promote a more resilient banking system that can weather shocks, whatever the source. The key building blocks to core bank resiliency are strong capital cushions, robust liquidity buffers, strong risk management and supervision, and better market discipline through transparency.”