The Basel Committee has issued revised minimum capital requirements for market risk. Key features of the revised framework include:
- changes to the boundary between the trading book and the banking book, to reduce incentives to arbitrage between the regulatory banking and trading books;
- a revised internal models approach for market risk. This introduces a more rigorous model approval process and places limits on the capital-reducing effects of hedging and diversification;
- a revised standardised approach for market risk to make it sufficiently risk-sensitive to serve as a credible fallback to the internal models approach;
- a shift from value-at-risk to an expected shortfall measure of risk under stress; and
- incorporation of the risk of market illiquidity.
The revised framework produces market risk risk-weighted assets (RWAs) that account for less than 10% of total RWAs, compared to approximately 6% under the current framework. The revised market risk standard would result in a median increase of approximately 22% in total market risk capital requirements as against the current standards. The revised market risk framework comes into effect on 1 January 2019. (Source: Basel Committee Revises Capital Requirements for Market Risk)