In June 2008, the Basel Committee on Banking Supervision (the Committee) published an assessment of fair value measurement and modelling challenges faced by banks during the market turmoil. Building on that work as well as its 2006 guidance on the use of the fair value option, the Committee has now published its final paper on supervisory guidance for assessing banks’ financial instrument fair value practices (the Guidance).
The Guidance sets out principles for banks and banking supervisors that seek to strengthen valuation processes for financial instruments. The principles promote strong governance processes around:
- The use of reliable inputs and diverse information sources.
- The articulation and communication of valuation uncertainty to internal and external stakeholders.
- The allocation of sufficient banking and supervisory resources to the valuation process.
- Independent verification and validation processes.
- Consistency in valuation practices for risk management and reporting purposes, where possible.
- Strong supervisory oversight around bank valuation practices.