In January 2016, the Basel Committee on Banking Supervision published the standard Minimum capital requirements for market risk (hereafter “January 2016 standard”). This new market risk standard was developed to address a number of structural shortcomings in the Basel II market risk framework (and its subsequent revisions), and served as a key component of the Basel Committee’s reform of global regulatory standards in response to the global financial crisis.
In the time since its publication, the Basel Committee has monitored the pace of implementation of the market risk standard as well as its impact on banks’ market risk capital requirements. In acknowledgment of ongoing challenges related to implementation of the standard, the Basel Committee’s oversight body, the Group of Governors and Heads of Supervision (GHOS), has endorsed an extension of the implementation date to 1 January 2022 (which will constitute both the implementation and regulatory reporting date for the standard). This deferred implementation date is intended to allow banks additional time to develop the systems infrastructure needed to apply the standard and for the Committee to address certain specific outstanding issues.
In order to address the issues with the standard that the Committee has identified, this consultative document proposes a number of revisions to the standard. It also sets out the Committee’s proposals for a simplified alternative to the revised standardised approach to market risk, which take into account responses to the consultative document the Committee issued in June 2017.
1. Standardised apporoach
A major structural shortcoming of the Basel II market risk framework is that it does not feature a risk-sensitive standardised approach that can serve as a credible fallback for, as well as a floor to, the internal models approach. The January 2016 standard intended to address this by introducing a revised standardised approach.
The main element of the revised standardised approach – the Sensitivities-based Method – relies on the use of “sensitivities”. “Sensitivities” are banks’ estimates of how much the values of their financial instruments change when the values of a prescribed list of underlying risk factors change. For example, banks are required to calculate the change in value of their financial instruments if there was a 1 basis point move in interest rates. (…)
2. Internal models approach
The internal models approach (IMA) set out in the January 2016 standard featured a number of enhancements relative to the Basel II framework, including: (i) enhanced requirements for approval to use models, including the introduction of a profit and loss (P&L) attribution (PLA) test that trading desks must pass on an ongoing basis in order to be eligible for the IMA; and (ii) more coherent and comprehensive methods to measure risk, including the introduction of distinct capital requirements for non-modellable risk factors (NMRFs).
To address a number of issues identified in the course of ongoing monitoring of the implementation of these aspects of the IMA and to facilitate its effective implementation, the Committee proposes the following revisions. (…)
3. Scope of market risk capital requirements
The January 2016 standard set out a revised definition of the scope of the market risk capital requirements. This included a new definition of the boundary between a bank’s trading book and its banking book, with the former to be subject to capital requirements under the market risk standard, and revisions to the standards for “structural FX positions” (ie FX positions that hedge a bank’s capital ratio and may therefore be exempted from FX capital requirements). (…)
Next steps
The Committee welcomes comments on all aspects of these proposals. The Committee’s scope of material potential revisions to the revised market risk framework are limited to those included in this consultative document. Respondents are requested to limit their feedback to views on the proposals contained herein. Comments should be uploaded at www.bis.org/commentupload.htm by 20 June 2018. All comments will be published on the website of the Bank for International Settlements unless a respondent requests confidential treatment. (…)
This is a summary of the Consultative document. You can read the full version on the website of the BIS.
Source: https://www.bis.org
