31 October 2013

Fundamental review of the trading book - second consultative document issued by the Basel Committee

This second consultative document provides more detail on the approaches introduced in May 2012, and sets out a draft text for a revised market risk framework. 

The key features of the proposed revised framework include:

• A revised boundary between the trading book and banking book. The new approach aims to create a less permeable and more objective boundary that remains aligned with banks' risk management practices, and reduces the incentives for regulatory arbitrage.
• A revised risk measurement approach and calibration. The proposals involve a shift in the measure of risk from value-at-risk to expected shortfall so as to better capture "tail risk", and calibration based on a period of significant financial stress.
• The incorporation of the risk of market illiquidity, through the introduction of "liquidity horizons" in the market risk metric, and an additional risk assessment tool for trading desks with exposure to illiquid, complex products.
• A revised standardised approach that is sufficiently risk-sensitive to act as a credible fallback to internal models, and is still appropriate for banks that do not require sophisticated measurement of market risk.
• A revised internal models-based approach, encompassing a more rigorous model approval process, and more consistent identification and capitalisation of material risk factors.
• A strengthened relationship between the standardised and the models-based approaches.
• A closer alignment between the trading book and the banking book in the regulatory treatment of credit risk. This involves a differential approach to securitisation and non-securitisation exposures.

Full press release

Full consultative document

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