The Basel Committee on Banking Supervision's oversight body has endorsed its plans to ease new rules which make banks hold more capital against their trading books, providing a boost to investment banks.
The revisions, endorsed Jan. 14 by the group of central bank governors and heads of supervision, would result in a weighted average increase of about 22% in total market risk capital requirements for banks relative to the Basel 2.5 guidelines issued in 2016. This is a sharp reduction on the 40% increase originally required.
The share of risk-weighted assets attributable to market risk, caused by interest rate changes and changes to foreign exchange rates for instance, remains low, at around 5% of total risk-weighted assets, the Bank for International Settlements said.
The market risk framework has detailed guidelines to document the boundary between the banking book and the trading book. The rules first published in 2016 are designed to discourage investment banks from taking too much risk on to their own books as they buy and sell securities from clients. They form part of a series of changes overhauling how banks calculate their risk-weighted assets, called the Fundamental Review of the Trading Book.
The revisions endorsed focus on the standardized model for calculating market risk. Banks can use their own models, which tend to be more generous, but only if they pass a profit-and-loss attribution test. Originally a pass or fail test, the new revisions provide for a "traffic light" system whereby trading desks on "amber" would not have to transfer to the standardized model.
"The final revisions to the market risk framework provide additional clarity to the Basel III postcrisis reforms, and allow banks and supervisors to implement the framework in a timely manner.
"Looking ahead, the committee will increasingly focus on evaluating postcrisis reforms and addressing new and emerging vulnerabilities in the banking system," said Mario Draghi, European Central Bank president and chairman of the group of central bank governors and heads of supervision.
The implementation date of the market risk rules is 2022. The Basel Committee's minimum standards are typically transposed into national regulations worldwide.