New norms on treatment of banks' illiquid assets

 The Reserve Bank of India issued draft guidelines on prudent valuation of banks’ long-term assets which are illiquid in nature.

“The prudent valuation adjustment for illiquid positions has assumed greater importance in the wake of the recent financial crisis,” RBI said in the draft supplementary guidance.
“This guidance seeks to provide indicative guidelines to banks to define illiquid positions and subsequent valuation adjustments through Tier I capital,” it said.

The guidance also contains certain additional valuation adjustment to be made to the derivatives portfolio, it said.

These guidelines require banks to make specified valuation adjustments for various risks or costs in their portfolios including derivatives, which are subject to ‘mark to market’ requirement and also for illiquidity of these positions.

The guidelines on which comments are invited till October 19, permit banks to follow any recognised model or method for computing the amount of valuation adjustment.