An important element of the Basel Committee on Banking Supervision’s (BCBS) work to revise the trading book standards is its quantitative impact assessments, in which banks play a key role. These assessments help the BCBS to better understand the effects of the new framework on capital requirements and further refine the standards.
The BCBS has now published a report which contains the findings of a recent quantitative impact assessment on the impact of proposals to revise the internal models-based approach for market risk, as set out in the second consultative paper of the BCBS’ fundamental review of the trading book.
The assessment covered 41 banks from 13 countries. The report provides preliminary findings on some of the potential effects of the proposed standards on regulatory capital for market risk. In particular the report notes that:
- the variability of the proposed expected shortfall and incremental default risk measures is similar to the measures in the current regulatory capital framework;
- the aggregate impact of the proposed internal models based approach would be an increase in capital requirements for all asset classes with the exception of equities;
- scaling expected shortfall based on a 10-day or one-day measure results in consistent median capital outcomes;
- reducing a bank’s unconstrained use of correlation factors across asset classes increases the overall level of capital requirements; and
- only a small proportion of participating banks properly computed the capital charges for non-modellable risk factors and the incremental capital charge on equity instruments.
The findings in the report and the BCBS’s analysis of the capital impact data derived from a further quantitative impact assessment will inform its thinking on the final calibration of the new framework for the trading book capital standard.
View Analysis of the trading book hypothetical portfolio exercise, 9 September 2014