On January 14th, the Basel Committee on Banking Supervision (BCBS) published its revised capital requirements for market risk. The final standard, also known as the Fundamental Review of the Trading Book, is intended to harmonize the treatment of market risk across national jurisdictions and will generally result in higher global capital requirements. BCBS estimates a median capital increase of 22% and a weighted-average capital increase of 40%. However, we believe this impact can be somewhat mitigated by portfolio re-optimization.
- Standardized approaches continue to gain regulatory favor.
- The new standardized approach is more risk sensitive.
- The new boundary between the trading book and banking book will limit the potential for regulatory arbitrage.
- Internal models attract more regulatory scrutiny.
- A new, costly measure to capture internal models’ tail risk.
- More granular liquidity horizons for internal models-based approach.
- Capital requirements likely to further increase due to the introduction of non-modellable risk factors in the internal model-based approach.
- Credit migration risk no longer modelled with the introduction of the Default Risk Charge.
- Correlation trading positions no longer allowed to be measured using internal models.
- Banks will need more data and stronger data analysis to meet new risk measurement and reporting requirements.