What Fundamental review of the trading book requires
This consultative document presents the initial policy proposals emerging from the Basel Committee’s fundamental review of trading book capital requirements, intended to strengthen capital standards for market risk and contribute to a more resilient banking sector. The review was initiated because the financial crisis exposed material weaknesses in the design of the framework for capitalising trading activities, where the level of capital proved insufficient to absorb losses. The proposals address shortcomings in the overall design of the regime as well as weaknesses in risk measurement under both the internal models-based and standardised approaches. The Committee's key areas of focus include a reassessment of the trading book/banking book boundary, with proposals for a "trading evidence-based" or a "valuation-based" boundary. It intends to move to a capital framework that is calibrated to a period of significant financial stress. A significant proposal is moving from Value-at-Risk (VaR) to Expected Shortfall (ES) to better capture "tail risk". The proposals also seek a comprehensive incorporation of the risk of market illiquidity, using "liquidity horizons" defined as the time required to exit or hedge a risk position in a stressed market. The Committee is also considering the treatment of hedging and diversification, and strengthening the relationship between the standardised and internal models-based approaches, potentially by introducing the standardised approach as a floor.
Pillar: Banking & Global Finance · Authority: Basel Committee on Banking Supervision · Version: 1.0.0 · Last updated:
Primary source: https://www.bis.org/publ/bcbs219.pdf
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Primary Citations — 8 traced to source
- Executive Summary, Page 1: The financial crisis exposed material weaknesses in the overall design of the framework for capitalising trading activities and the level of capital requirements for trading activities proved insufficient to absorb losses.
- Executive Summary, Page 2: Any item included in the regulatory trading book would need to be marked to market daily with changes in fair value recognised in earnings.
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