The Basel Committee on Banking Supervision (Basel Committee) has issued the revised minimum capital requirements for market risk as agreed by its oversight body – the Group of Governors and Heads of Supervision. The revised market risk framework is a key component of the Basel Committee’s overall efforts to reform global regulatory standards in response to the global financial crisis.

The revised market risk framework includes the following key enhancements:

• a revised internal models-approach (IMA). The revised approach introduces a more rigorous model approval process that enables supervisors to remove internal modelling permission for individual trading desks, more consistent identification and capitalisation of material risk factors across banks, and constraints on the capital-reducing effects of hedging and diversification;
• a revised standardised approach (SA). The revisions overhaul the standardised approach to make it sufficiently risk-sensitive to serve as a credible fallback for, as well as a floor to, the IMA, while still providing an appropriate standard for banks that do not require a sophisticated treatment for market risk;
• a shift from Value-at-Risk (VaR) to an Expected Shortfall (ES) measure of risk under stress. It is expected that use of ES will help to ensure a more prudent capture of “tail risk” and capital adequacy during periods of significant market stress;
• incorporation of the risk of market illiquidity. Varying liquidity horizons are incorporated into the revised SA and IMA to mitigate the risk of a sudden and severe impairment of market liquidity across asset markets. These replace the static 10 day horizon assumed for all traded instruments under VaR in the current framework; and
• a revised boundary between the trading book and banking book. A more objective boundary is established that is intended to reduce incentives to arbitrage between the regulatory banking and trading books, while still being aligned with banks’ risk management practices.

The revised market risk framework comes into effect on 1 January 2019.

View Revised framework for market risk capital requirements issued by the Basel Committee, 14 January 2016