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Causal Capital ~ The Knowledge Capital Specialists

Capital Requirements for Market Risk

The Bank for International Settlements has just amended (finally released) the Market Risk standard for Minimum Capital requirements for banks. Much of this update comes as no surprise to risk managers and these revisions were due for endorsement by the Central Regulator anyway. As we can expect, key changes driven by BIS activities around the Fundamental Review of the Trading Book continue to influence the theme of this publication.

You can download the BIS publication from the following [LINK] and some of the revisions Include:

» Introducing but also finalising a simplified version of the standardised approach for banks that have basic trading books.

» Improvements to resolve various aspects of curvature risk measurement that help market risk analysts reduce cliff effects from aggregation models have been addressed.

» Enhancements should also help Market Risk analysts avoid double-counting issues through a clear definition of FX exposures relative to their reporting currency.

» BIS has revised the Risk Weights after the previous monitoring phase from January 2016 recommendations, and market risk analysts will find the risk weights are more generous to the front office with up to 40% benefits in some places. The regulator stated that they will continue to monitor the impacts of the new Risk Weights and may adjust them in the future as conditions or performance changes. I suppose we can expect some changes here.

» BIS have also approved the revised requirements for identifying risk factors that are eligible for internal modelling.

» P&L Attribution test now has clear guidance for Back Testing and Treatment of Exceptions.

This revision is due for implementation 1st January 2022 but local banking regulators for each jurisdiction will inevitably stipulate their own timetable as the usually do.

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