On July 22, the Basel Committee on Banking Supervision issued for public comment “Guidelines for Computing Capital for Incremental Risk in the Trading Book” as well as “Proposed Revisions to the Basel II Market Risk Framework.”
The Basel Committee’s incremental risk proposal sets out to better align regulatory capital requirements with respect to risk exposure of banks’ trading book positions. The guidelines address computing capital for incremental default risk, and contain an expansion of the scope of capital charge. Further, the proposed incremental risk charge (IRC) attempts to capture price changes due to defaults as well as other sources of price risk, such as those reflecting credit migrations and significant moves of credit spreads and equity prices. The Basel Committee also proposes modifications to the Basel II Framework concerning internal VaR models, where the objective is to align the language with respect to prudent valuation for positions subject to market risk with existing accounting guidance. In addition, it has clarified that regulators will retain the ability to require adjustments to current value beyond those required by financial reporting standards, in particular where there is uncertainty around the current realizable value of a position due to illiquidity.
Comments on the guidelines and revisions are due by October 15 and may be sent via email to [email protected].