Fundamental review of the trading book - consultative document

May 2012

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:

  • A more objective boundary between the trading book and the banking book that materially reduces the scope for regulatory arbitrage - feedback is sought on two alternative approaches;
  • Moving from value-at-risk to expected shortfall, a risk measure that better captures "tail risk";
  • Calibrating the revised framework in both the standardised and internal models-based approaches to a period of significant financial stress, consistent with the stressed value-at-risk approach adopted in Basel 2.5;
  • Comprehensively incorporating the risk of market illiquidity, again consistent with the direction taken in Basel 2.5;
  • Measures to reduce model risk in the internal models-based approach, including a more granular models approval process and constraints on diversification; and
  • A revised standardised approach that is intended to be more risk-sensitive and act as a credible fallback to internal models.

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 baselcommittee@bis.org. 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.