Press Release on Market Risk

10 December 1996

Press release

1. In January 1996, the Basle Committee on Banking Supervision released an amendment to the Basle Capital Accord of July 1988 to apply capital charges to the market risks incurred by banks. The amendment, which will take effect at the latest at end-year 1997, permits banks, under supervisory guidance, to calculate their market risk capital charges according to one of two methods, a standardised measurement method or an approach based on the results of internal models. Those banks using internal models will be subject to a defined set of qualitative and quantitative standards designed to reinforce banks' efforts to achieve high risk management standards.

2. Since the market risk package was agreed, the Basle Committee has been conducting further work regarding the impact of the two approaches on banks' capital requirements. This work has included reviewing estimates of the amount of capital required under both the standardised and the models approaches. These estimates, based on the actual portfolios of a number of major banks, indicate that the internal models approach will generally produce a lower capital charge than the standardised approach. The Committee believes that such results are consistent with its view that the internal models approach appropriately recognises the benefits of risk diversification strategies and provides incentives for firms to develop and implement sound internal models. Based on this work, the Committee confirms that the quantitative parameters, including the multiplication factor of three times the outcome of the value-at-risk calculations, will be retained.

3. Also in its January 1996 papers, the Basle Committee invited the industry to do further work on the modelling of "specific risk" (i.e. the risk that an individual position in a portfolio moves more or less than the general market). The Committee is encouraged by the progress made to date in the modelling of specific risk and is interested in continuing an active dialogue with the industry. However, while modelling of specific risk is clearly evolving, the Committee is not yet convinced that banks' internal models have advanced to a point where they can capture all elements of specific risk in an empirically-proven manner. It will therefore retain the present provision for the time being, namely that the total specific-risk charge be set at a floor of 50% of the specific-risk charge under the standardised approach. However, the Committee is ready to review the situation promptly if and when the industry can provide convincing evidence that specific risk is being adequately modelled.

10th December 1996