Global banking regulators issued a new set of proposals Thursday that aim to improve the setting of capital requirements for banks’ trading books.
The Basel Committee on Banking Supervision first issued a consultation paper proposing a fundamental review of capital requirements for trading books back in May 2012. This second paper sets out more detailed proposals, and provides a draft text for a revised market risk framework.
“This initiative forms part of the Committee’s broader agenda to reform regulatory standards for banks in response to the financial crisis,” it says.
The committee says the proposed revised framework includes: a revised boundary between the trading book and banking book that reduces the incentives for regulatory arbitrage; a shift from value-at-risk to expected shortfall in an effort to better capture “tail risk”; and, the incorporation of the risk of market illiquidity.
It also aims to create a revised standardized approach that represents a credible fallback to internal models, and is appropriate for banks that do not require sophisticated measurement of market risk.
For banks using an internal models-based approach, it introduces a more rigorous model approval process, and more consistent identification and capitalization of material risk factors. And, it establishes a closer calibration of the two approaches, by requiring mandatory calculation of the standardized approach by all banks, and mandatory public disclosure of standardized capital charges by all banks.
The Committee is also considering the possibility of introducing the standardized approach as a floor, or surcharge to the models-based approach. It says it will only make a final decision on this issue after undertaking research to assess the impact and interactions of the standardized and models-based approaches.
Comments on the consultation paper are due by Jan. 31, 2014.