This chapter provides banks with guidance on prudent valuation for positions that are accounted for at fair value, whether they are in the trading book or in the banking book.

Version effective as of 15 Dec 2019

First version in the format of the consolidated framework.

Introduction

50.1 This section provides banks with guidance on prudent valuation for positions that are accounted for at fair value, whether they are in the trading book or in the banking book. This guidance is especially important for positions without actual market prices or observable inputs to valuation, as well as less liquid positions which raise supervisory concerns about prudent valuation. The valuation guidance set forth below is not intended to require banks to change valuation procedures for financial reporting purposes. Supervisors should assess a bank’s valuation procedures for consistency with this guidance. One fact in a supervisor’s assessment of whether a bank must take a valuation adjustment for regulatory purposes under CAP50.11 to CAP50.14 should be the degree of consistency between the bank’s valuation procedures and these guidelines.

50.2 A framework for prudent valuation practices should at a minimum include the following.

Systems and controls

50.3 Banks must establish and maintain adequate systems and controls sufficient to give management and supervisors the confidence that their valuation estimates are prudent and reliable. These systems must be integrated with other risk management systems within the organisation (such as credit analysis). Such systems must include: