The Basel Committee on Banking Supervisions (Basel Committee) has announced that its governing body, the Group of Central Bank Governors and Heads of Supervision (GHOS), has endorsed the new market risk framework.

Notable improvements in the new market risk framework, which takes effect in 2019, include:

  • a revised boundary between the banking and trading books that will reduce scope for arbitrage;
  • a revised internal models approach with more coherent and comprehensive risk capture;
  • an enhanced model approval process and more prudent recognition of hedging and portfolio diversification; and
  • a revised standardised approach that serves as a credible fall-back and floor to the model based approach, and facilitates more consistent and comparable reporting of market risk across banks and jurisdictions.

The GHOS also agreed that the Basel Committee would complete its work to address the problem of excessive variability in risk-weighted assets by the end of 2016. Such work will include a:

  • consultation on the removal of internal model approaches for certain risks (such as the removal of the Advanced Measurement Approach for operational risk); and
  • consultation on setting additional constraints on the use of internal approaches for credit risk, in particular through the use of floors.

The GHOS will review the Basel Committee’s proposals on the risk-weighted framework and the design and calibration of capital floors at or around the end of 2016. A quantitative impact assessment will be conducted during the course of this year. As a result of this assessment, the Basel Committee will focus on not significantly increasing overall capital requirements.

Members of the GHOS also agreed that the leverage ratio should be based on a Tier 1 definition of capital and should comprise a minimum level of 3%. Additional requirements for global systemically important banks was also discussed. The GHOS will finalise the calibration this year to allow sufficient time for the leverage ratio to be implemented as a Pillar 1 measure by 1 January 2018.

View BCBS new market risk framework and work programme for Basel Committee is endorsed by its governing body, 11 January 2016