The Basel Committee on Banking Supervision said it will require financial institutions to set aside capital for assets including collateralized debt obligations and asset-backed commercial paper.
Such "resecuritizations" were not addressed in the version of Basel II that international regulators finalized in 2006 and helped contribute to losses that have dogged the industry during the financial crisis. To address the gap, the committee amended Pillar 1 of Basel II to require a 20% risk-weight for senior resecuritizations with a triple-A rating.
The risk-weight increases as the credit rating declines and the change takes affect Dec. 31, 2010.
The committee also revised Pillar 2 of Basel II to require "rigorous and sustained" supervision of compensation practices at financial institutions.
"Compensation policies should be linked to longer-term capital preservation and the financial strength of the firm, and should consider risk-adjusted performance measures," according to the committee. "In addition, a bank should provide adequate disclosure regarding its compensation policies to stakeholders."
Pillar 2, which gives examiners wide discretion to adjust capital levels at individual banks, also requires supervisors to consider off-balance-sheet assets and reputational risks when judging an institution's capital adequacy. These changes will be implemented immediately.
Only one bank is said to have begun implementation of Basel II in the U.S. Institutions with more than $250 billion in assets have until April 1, 2011 to complete four consecutive quarters of a "parallel run," in which they comply with Basel I and Basel II capital requirements simultaneously.
