Global banking regulators are concerned that banks are properly prepared for the impact of rising interest rates, particularly given the historically low rates that have prevailed in many markets since the financial crisis.
The Basel Committee on Banking Supervision issued a consultation paper on Monday, which proposes a couple of options for reforming its approach to ensuring that the capital adequacy regime properly accounts for banks’ interest rate risk.
The committee is reviewing the regulatory approach in this area to help ensure that banks have enough capital to cover potential losses from exposures to changes in interest rates, it says.
“This is particularly important in the light of the current exceptionally low interest rate environment in many jurisdictions.”
The committee is also concerned about limiting capital arbitrage between the trading book and the banking book, it says, and between banking book portfolios that are subject to different accounting treatments.
The two proposals include either adopting a uniform measure for calculating minimum capital requirements, or a more flexible approach that would also require quantitative disclosure of rate risk based on a uniform measure.
The first option would have the benefit of promoting greater consistency, transparency and comparability, the committee says, “thereby promoting market confidence in banks’ capital adequacy and a level playing field internationally”.
However, the second approach would better accommodate differing market conditions and risk management practices across various jurisdictions.
Comments on the proposals are due by Sept. 11.