Global banking regulators have published proposals that would revise capital requirements to better capture risks in banks’ trading books.
The Basel Committee on Banking Supervision issued a consultation paper Thursday, setting out the results of a fundamental review of trading book capital requirements. It proposes a revised market risk framework, and a number of specific measures to improve trading book capital requirements.
The proposals include: establishing a more objective boundary between the trading book and the banking book that reduces the scope for regulatory arbitrage; moving from value-at-risk to expected shortfall to better capture “tail risk”; calibrating the revised framework in both the standardized and internal models-based approaches to a period of significant financial stress; comprehensively incorporating the risk of market illiquidity; measures to reduce model risk in the internal models-based approach; and, a revised standardized approach that is intended to be more risk-sensitive and act as a credible fallback to internal models.
The committee is also proposing to strengthen the relationship between the models-based and standardized approaches by establishing a closer link between the calibration of the two approaches, requiring mandatory calculation of the standardized approach by all banks, and it is considering the merits of introducing the standardized approach as a floor or surcharge to the models-based approach. Additionally, the treatment of hedging and diversification will be more closely aligned between the two approaches, it says.
The policymakers indicate that the proposals will strengthen capital standards for market risk, and thereby contribute to a more resilient banking sector.
Comments on the proposals are due by September 7.