Basel Committee Proposes Trading Book Changes

The Basel Committee on Banking Supervision on Thursday proposed new ways to calculate trading risks, the next stage in their ongoing effort to keep banks stable in stormy markets.

Sources with knowledge of the committee’s plans said it was too early to say if the changes would significantly increase banks’ capital requirements.

In recent months the committee has required banks to hold more capital against risky instruments like securitized and structured products than it had in the past.

While those rule changes were widely viewed as a temporary solution to quickly correct undercapitalized trading books, the new move would be a fundamental reform of how banks manage trading risk, changing the boundary between a bank’s trading and banking books, along with risk management and capital requirements.

One factor that could determine whether an instrument may be part of a trading book is whether it can actually be traded. It would be valued daily to reflect market changes and included in quarterly earnings.

Instead of the current risk calculation model, which is based on the probability that a portfolio will have a loss of more than a given amount over a given period of time, the committee proposes requiring banks to switch to the “expected shortfall” model, which combines the current approach with a consideration of possible losses from unlikely events.

The planned changes are out for public consultation until September and the committee will make concrete proposals next year for further industry feedback. The changes are unlikely to be implemented before 2015 at the earliest.

Read more about the proposed rule.

Photo credit: Vinni123

Share this post

Share on facebook
Share on twitter
Share on linkedin
Share on pinterest
Share on print
Share on email

Stay On Top Of The Debt Relief Industry's Regulatory Landscape

On November 6-7, 2022, Shipkevich PLLC will be hosting a Regulatory Workshop in Costa Mesa, California focusing on the fundamental regulatory issues facing debt relief professionals and how they can adapt.