The papers set out the proposed enhancements to the regulatory capital treatment for trading book exposures, including an 8% capital charge for specific risk of equities in all cases.
The Committee released two consultation papers on the revisions to the Basel II market risk framework and on the Guidelines for computing capital for incremental risk in the trading book. The papers set out the Committee's proposed enhancements to the regulatory capital treatment for trading book exposures.
The Committee proposes to supplement the current value-at-risk-based trading book framework with an incremental risk capital charge (IRC), which includes default risk as well as migration risk, for unsecuritised credit products. For securitised products, the capital charges of the banking book would apply. Once implemented, the IRC will reduce the incentive for regulatory arbitrage between the banking and trading books.
The Committee also proposes to require banks to calculate a stressed VaR taking into account a one-year observation period relating to significant losses, which would be in addition to the VaR based on the most recent one-year observation period. The additional stressed VaR requirement will help reduce the procyclicality of the minimum capital requirements for market risk.
In addition, the Committee proposes to discontinue the preferential treatment of a 4% capital charge for specific risk of equities that is currently applicable to portfolios that are both liquid and well-diversified. As a result, an 8% capital charge for specific risk of equities would apply in all cases.
Furthermore, the Committee will be initiating a longer-term, fundamental review of the risk-based capital framework for trading activities
Deadline for comments is 13 March 2009.
Press release
Consultation on revisions to the Basel II market risk framework
Consultation on guidelines for computing capital for incremental risk in the trading book
Overall press release
See also consultsation on enhancements to the Basel II framework
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