Minimum capital requirements for market risk
5 October 2019
The Minimum capital requirements for market risk replaces an earlier version of the standard as published in January 2016.
The standard has been revised to address issues that the Basel Committee identified in the course of monitoring the implementation and impact of the framework. This final standard incorporates changes that were proposed in a March 2018 consultative document and has been informed by a quantitative impact based on data as of end-December 2017.
As in the January 2016 framework, the core features of the standard include:
- a clearly defined boundary between the trading book and the banking book;
- an internal models approach that relies upon the use of expected shortfall models and sets out separate capital requirements for risk factors that are deemed non-modellable; and
- a standardised approach that is risk-sensitive and is designed and calibrated to serve as a credible fallback to the internal models approach.
Revisions to the January 2016 framework include the following key changes:
- a simplified standardised approach for use by banks that have small or non-complex trading portfolios;
- clarifications on the scope of exposures that are subject to market risk capital requirements;
- refined standardised approach treatments of foreign exchange risk and index instruments;
- revised standardised approach risk weights applicable to general interest rate risk, foreign exchange and certain exposures subject to credit spread risk;
- revisions to the assessment process to determine whether a bank’s internal risk management models appropriately reflect the risks of individual trading desks; and
- revisions to the requirements for identification of risk factors that are eligible for internal modelling.
This revised standard comes into effect on 1 January 2022.
The Basel Committee has published an accompanying explanatory note to provide a non-technical description of the overall market risk framework, the changes that have been incorporated into in this version of the framework and impact of the framework. The note also sets out a number of worked examples to illustrate the application of the framework’s standardised approach.
The standard text has been prepared in a new modular format that adopts the style of the new “consolidated framework” which the Basel Committee will apply to all standards on its website in the coming months. The standard is available in two versions – one version which includes previously published frequently asked questions (FAQs) that are relevant to the framework and one version without the associated FAQs.