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Big banks set to gain as Basel eyes lower capital burden for market risk

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Big banks set to gain as Basel eyes lower capital burden for market risk

Changes to global rules are set to cut capital requirements for banks' exposures to foreign exchange, equity and interest rate-based securities, with the largest global banks likely to benefit most.

The Basel Committee on Banking Supervision on March 22 proposed reducing risk-weights for assets classed under the general interest rate label by 20-40% and for the foreign exchange and equity categories by 25-50%, "based on impact data" gathered in the last two years.

"The Committee’s monitoring of the impact of the January 2016 standard indicates that the currently reported capital impact of the revised standardized approach is not consistent with its initial expectations," said the Basel Committee in a press release.

As the minimum amount of capital banks are required to hold is calculated as a percentage of risk-weighted assets, a lowering of weights will make it cheaper for lenders using the so-called standardized approach to risk to hold foreign exchange and shares.

Additionally, those banks which use their own formulas to determine the likelihood of loss would also benefit because, under a December 2017 agreement, they are required to hold at least 72.5% of the capital against an asset that would have been required had they been using the standardized approach.

While most of the world's banks have comparatively insignificant market risk exposures – no more than about 5% of total risk-weighted assets, many of the biggest global banks have market exposures of up to 30% of their risk-weighted assets.

As a result, firms such as JPMorgan Chase & Co., Goldman Sachs & Co. LLC and Barclays Bank Plc stand to benefit significantly from the changes.

The Basel Committee is a forum for the world's central bankers. The proposals will be under consultation until June 20, and would only take effect if formally adopted by each participating country. The planned implementation date is Jan 1, 2022, the Basel Committee said.