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U.S regulators' knack for going beyond international standards is prompting industry worries over the cumulative effect of different jurisdictions' capital regimes.
January 7 -
The Federal Reserve issued a proposal Monday outlining a framework to implement a countercyclical capital buffer for the largest and most internationally active banks, a key part of Basel III that has until now lacked any details.
December 21 -
The Financial Stability Board finalized a standard Monday that will require 30 of the worlds largest banks to hold a combination of debt and equity that could be used to absorb losses and facilitate a resolution if one of them were to become insolvent.
November 9
WASHINGTON – The Basel Committee on Banking Supervision released the text of its anticipated revised market risk framework on Thursday, one of the last and most important remaining unfinished aspects of the 2010 Basel III accords.
The revised framework focuses on three areas: setting tougher standards on bank trading books, improving standards for internal bank market risk models, and making revisions to the baseline requirements for standardized risk management models. The committee estimated that the final rules could add substantial capital requirements to affected banks.
"Compared to the current framework, the revised market risk capital standard is likely to result in an approximate median increase of 22% [or 40% weighted average increase] in total market risk capital requirements (i.e., including securitization and non-securitization exposures within the scope of the market risk framework)," the committee's explanatory note said. "The impact estimates based on the January 2016 revisions to the market risk framework do not take account of any adjustments that banks may make over the next few years."
The framework includes a revised boundary between a bank's banking book – that is, its own assets in portfolio – and its trading book, which are assets that it keeps as a market maker or otherwise has for sale. The boundary is in response to concerns that banks might shift assets from one book to another in order to avoid capital requirements in place for the banking book. The new framework sets limits on a bank's ability to move assets from one book to the other, enhances supervisor's power to switch assets from one book to another and requires banks to report changes.
Basel III allows certain large and/or internationally active banks to use so-called advanced approaches, or regulator-approved internal models, to determine appropriate levels of risk-based capital, rather than relying on regulator-developed standardized models. In the U.S., 10 of the largest banks have approved internal models. Concerns have been raised that some banks' approved models are insufficiently stringent and that some regulators have approved models that are not up to scratch.
The revised framework addresses this by requiring internal models to take a more standardized approach to assessing risks, including assessing losses in times of "significant market stress" and considering size and risk of market illiquidity in modeling assessments. It also requires a more granular process for regulators to approve internal models, including requiring banks to demonstrate proficiency in accurately modeling profit and loss, giving regulators the power to approve or disapprove models at individual trading desks, and checking the effectiveness of models by comparing actual performance to projected performance.
Finally, the framework revises the guidelines for regulators' own standard – a kind of "floor" for modeling in the case that banks' internal models are deemed inadequate. Those guidelines include a closer calibration between internal models and standardized models, particularly concerning a greater reliance on risk sensitivities as inputs; an expansion of a sensitivities-based method for calculating certain risks; and a standardized default risk charge, where positions are placed in certain risk buckets by default.
The Group of Central Bank Governors and Heads of Supervision – the overseeing body of the Basel Committee on Banking Supervision – said on Jan. 11 that the revised framework had been agreed to and the details would be made public "in the coming days."
