Basel Committee sets rules for fair pricing

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The Basel Committee on Banking Supervision says banks should use 'judgment' in valuing assets.

GENEVA - Banks should carefully judge the value of their illiquid assets, rather than rely on current market prices to determine a fair price, international banking supervisors said.

"Determining fair value in a market that has become inactive depends on the facts and circumstances and may require the use of significant judgment," said the Basel Committee on Banking Supervision in recommendations published late Wednesday.

The valuation of illiquid assets became important in recent months, as banks sought to put a price on their holdings, even when the assets were no longer tradable because markets were frozen.

In order to reflect market conditions, banks reduced the value of their assets in each quarter. In turn, banks sought fresh capital from shareholders in order to balance their books.

In its new guidelines for banks and regulators, the Basel Committee said while a bank should consider market prices in the valuation process, it "does not conclude automatically that any transaction price is determinative of fair value."

Instead, a bank should apply systems of valuation that would be used even during the normal functioning of the markets.

Even if "third parties" are used in the valuation process, the management of the bank should not be relieved of its "oversight responsibility to ensure appropriate fair valuations," the supervisors said.

The Basel Committee, which assembles national central bankers and regulators, first published a draft of these guidelines in November 2008.

It followed action taken by European leaders in October to suspend so-called "mark-to-market" accountancy rules in order to stabilise bank balance sheets.

In early April, the US accounting industry also agreed to change the "mark to market" accounting standard.

These rules were tightened after corporate scandals including energy giant Enron, which used unrealistic figures to inflate its worth.

Some analysts believe that by forcing banks to recognise losses immediately during the current economic crisis, the rules worsened the situation by requiring financial institutions to raise new capital to offset losses.

This limited the banks’ ability to make new loans to boost economic activity.

The Basel-based committee led by Dutch central bank president Nout Wellinck is an advisory and cooperation body that brings together official banking supervisors from 20 countries, including the world's major financial centres.

AFP / Expatica

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