22 July 2008

Basel Committee consults on market risk framework

The Basel Committee proposes improvements to the Basel II Framework concerning internal VaR models. It has further aligned the language with respect to prudent valuation for positions subject to market risk with existing accounting guidance. In addition, it has clarified that regulators will retain the ability to require adjustments to current value beyond those required by financial reporting standards, in particular where there is uncertainty around the current realisable value of a position due to illiquidity.

The Basel Committee expects firms to comply with them by 1 January 2010. However, firms will be allowed an additional year to incorporate into their IRC models all risks covered by the proposed IRC beyond default and migration risks for positions subject to credit risk.

Until the IRC is implemented in 2010 and to ensure that firms hold adequate capital for resecuritisations, an interim treatment will apply. This interim treatment will be specified in a separate proposal that will be issued by the Basel Committee later in 2008. Over a longer term horizon, the Committee also intends to review the VaR approach for the trading book including the specific risk capital charges under the standardised approach.

The Committee will conduct a two-stage quantitative impact study of the IRC on firms' capital requirements. In the first stage, the Committee plans to rely largely on data collected in connection with the 2007 incremental default risk proposal to examine the impact of incorporating default and migration risk into the IRC. In stage two, additional data will be collected to examine the impact of incorporating other risks.

Deadline for comments is 15 October 2008.

Press release

Revisions to the Basel II market risk framework.

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