Global banking regulators have finalized a series of proposed revisions to the capital rules designed to better capture market risk.
The Basel Committee’s oversight body, the Group of Central Bank Governors and Heads of Supervision (GHOS), has endorsed the new market risk framework. The full text of the new framework will be published in the days ahead.
The new risk framework, which takes effect in 2019: includes improvements to reduce the scope for arbitrage by revising the boundary between the banking and trading books; revises the internal models approach to better capture market risk; enhances the process for approving internal models to provide more prudent recognition of hedging and portfolio diversification; and adopts changes to the standardized approach that “facilitates more consistent and comparable reporting of market risk across banks and jurisdictions,” the according to a statement released on Monday by the Basel Committee.
Additionally, the GHOS also discussed the final design and calibration of the leverage ratio, which is scheduled to take effect on Jan. 1, 2018. The regulators agreed that the ratio should be based on a Tier 1 definition of capital, and should have a minimum level of 3%. They also discussed additional requirements for global systemically important banks. The GHOS aims to finalize these requirements in 2016.
“The agreements reached today provide greater clarity on important elements of the risk-based framework and the leverage ratio, and a clear path for completing post-crisis reforms,” says Mario Draghi, chairman of the GHOS and president of the European Central Bank (ECB), in a statement.
In addition to agreeing on a new market risk framework, the GHOS also agreed that the Basel Committee would address the problem of excessive variability in risk-weighted assets by the end of 2016.
Stefan Ingves, chairman of the Basel Committee and governor of Sveriges Riksbank, notes that, “finalizing the new market risk framework represents an important milestone towards completing the Basel III reforms. The Committee expects to publish further details of proposed revisions to the risk-weighted assets framework following its March meeting.”