Revised market risk framework and work programme for Basel Committee is endorsed by its governing body
11 January 2016
At its meeting in Basel on Sunday 10 January, the Basel Committee’s oversight body, the Group of Central Bank Governors and Heads of Supervision (GHOS), endorsed the new market risk framework. The fundamental review of the market risk standard is a core component of the Basel III reform package.
Notable improvements in the new risk framework, which takes effect in 2019, include:
A revised boundary between the banking and trading books that will reduce scope for arbitrage;
A revised internal models approach with more coherent and comprehensive risk capture;
An enhanced model approval process and more prudent recognition of hedging and portfolio diversification; and
A revised standardised approach that serves as a credible fall-back and floor to the model-based approach, and facilitates more consistent and comparable reporting of market risk across banks and jurisdictions.
The full text of the new market risk framework will be published in the coming days.
The GHOS also agreed that the Committee would complete its work to address the problem of excessive variability in risk-weighted assets by the end of 2016. This programme will include the following key elements:
consultation on the removal of internal model approaches for certain risks (such as the removal of the Advanced Measurement Approach for operational risk); and
consultation on setting additional constraints on the use of internal model approaches for credit risk, in particular through the use of floors.
The GHOS will review the Committee’s proposals on the risk-weighted framework and the design and calibration of capital floors at or around the end of 2016. The Committee will conduct a quantitative impact assessment during the year. As a result of this assessment, the Committee will focus on not significantly increasing overall capital requirements.
The GHOS also discussed the final design and calibration of the leverage ratio. Members agreed that the leverage ratio should be based on a Tier 1 definition of capital and should comprise a minimum level of 3%, and they discussed additional requirements for global systemically important banks. The GHOS will finalise the calibration in 2016 to allow sufficient time for the leverage ratio to be implemented as a Pillar 1 measure by 1 January 2018.
Mario Draghi, Chairman of the GHOS and ECB President, said that “the agreements reached today provide greater clarity on important elements of the risk-based framework and the leverage ratio, and a clear path for completing post-crisis reforms.”
Stefan Ingves, Chairman of the Basel Committee and Governor of Sveriges Riksbank, noted that “finalising the new market risk framework represents an important milestone towards completing the Basel III reforms. The Committee expects to publish further details of proposed revisions to the risk-weighted assets framework following its March meeting.”