12 June 2008

BCBS: Assessment on fair value measurement and modelling

The paper summarises the BIS initial assessment of valuation practices and presents the key findings and follow-up actions. It discusses valuation shortcomings exposed during the market turmoil and challenges in the valuation process.

The paper summarises the BIS Committee's initial assessment of valuation practices and presents the key findings and follow-up actions. It discusses valuation shortcomings that were exposed during the market turmoil and challenges in the valuation process.

 

The Committee is also to develop supervisory guidance to assess the rigour of banks' valuation processes and promote improvements in risk management and control practices. The guidance will apply to all fair valued positions, whether trading, available for sale, or using the fair value option and will cover:

 

• Valuation governance and controls;

• The quality of banks' measurement tools and the appropriate use of a diverse set of valuation measures;

• The capacity to produce valuations during periods of stress and the associated decline in the availability of inputs;

• The robustness of banks' assessments of valuation uncertainty; and

• The quality of internal and external transparency.

 

The Committee will also work with accounting and auditing standard setters and auditors to promote standards and practices that enhance the reliability, verifiability and transparency of fair value estimates. Areas will include:

 

• Further guidance to promote reliable fair value estimates;

• Greater scope to use valuation adjustments to arrive at appropriate fair value estimates;

• identifying characteristics/criteria of observability of inputs, active and liquid markets, and day-one revenue recognition;

• Improvements to consolidation and de-recognition accounting treatments and related disclosures;

• Enhanced transparency around different valuation classifications, measurement approaches used and uncertainty around estimates; and

• Enhancements, where necessary, to auditing practices for fair value estimates.

 

Full paper

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