Fundamental review of trading book capital requirements: consultation by the Basel Committee

3 May 2012

The Basel Committee on Banking Supervision today issued a consultative document on the fundamental review of trading book capital requirements. These proposals will strengthen capital standards for market risk, and thereby contribute to a more resilient banking sector.

In July 2009, the Committee issued revisions to the market risk framework as part of the "Basel 2.5" package. These revisions substantially increased capital requirements for trading activities, particularly for securitisations and structured credit products, recognising the substantial losses incurred by banks during the financial crisis.

However, Basel 2.5 largely built on the existing regulatory definitions and framework. At the same time, the Committee commenced a fundamental review of trading book capital requirements. Its intent has been to comprehensively evaluate the overall design of the market risk regulatory regime as well as weaknesses in risk measurement under the framework's internal models-based and standardised approaches.

This consultative document sets out a revised market risk framework and proposes a number of specific measures to improve trading book capital requirements. These proposals reflect the Committee's increased focus on achieving a regulatory framework that can be implemented consistently by supervisors and which achieves comparable levels of capital across jurisdictions.

Key elements of the proposals include:

The Committee is also proposing to strengthen the relationship between the models-based and standardised approaches by establishing a closer link between the calibration of the two approaches, requiring mandatory calculation of the standardised approach by all banks, and considering the merits of introducing the standardised approach as a floor or surcharge to the models-based approach. Furthermore, the treatment of hedging and diversification will be more closely aligned between the two approaches.

Comments on this consultative document should be submitted by Friday 7 September 2012 by e-mail to Alternatively, comments may be sent by post to the Secretariat of the Basel Committee on Banking Supervision, Bank for International Settlements, CH-4002 Basel, Switzerland. All comments will be published on the Bank for International Settlements's website unless a commenter specifically requests confidential treatment.

Once the Committee has reviewed responses, it intends to release for comment a more detailed set of proposals to amend the Basel III framework. In line with its normal process, the Committee will also subject such proposals to a thorough Quantitative Impact Study.