The Basel Committee on Banking Supervision on Thursday announced the details of the latest revisions to bank capital requirements designed to better capture market risk, which will likely push many banks to hold more capital.
Earlier this month, the Basel Committee announced that its oversight body, the Group of Governors and Heads of Supervision (GHOS), had agreed to revise the market risk component of the capital adequacy regime, known as Basel III.
See: Central bankers endorse revised market risk framework
An impact analysis indicates that the median increase in market risk capital requirements under the new framework compared with the existing framework is approximately 22%, and the weighted mean increase is 40%, the Basel Committee says in the announcement.
The amendments include: a revised boundary between the trading book and banking book in order to reduce the incentive to arbitrage between them; a more rigorous approval process for banks that use internal models to calculate their capital requirements; and changes to the standardized approach to improve its risk-sensitivity. The new framework also shifts from using “value-at-risk” measures to an “expected shortfall” measure of risk under stress, and it incorporates the risk of market illiquidity into both the standardized and internal model approaches.
The revised market risk framework doesn’t come into effect until Jan. 1, 2019, giving banks plenty of time to adjust to the new rules.