Supervisory guidance for assessing banks' financial instrument fair value practices
The purpose of this document is to provide guidance to banks and banking supervisors to help strengthen their assessment of banks' valuation processes for financial instruments and promote improvements in banks' risk management and control processes. The principles in this document cover supervisory expectations regarding bank practices and the supervisory assessment of valuation practices. The principles seek to promote a strong governance process around valuations; the use of reliable inputs and diverse information sources; the articulation and communication of valuation uncertainty both within a bank and to 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; and strong supervisory oversight around bank valuation practices. This guidance applies to all financial instruments that are measured at fair value, both in normal market conditions and during periods of stress, and regardless of the financial reporting designation within a fair value hierarchy. This guidance does not set forth additional accounting requirements beyond those established by the accounting standard setters. The supervisory expectations set forth in this guidance are applicable to all banks. However, the extent of application should be commensurate with the significance and complexity of a bank's fair valued exposures.