Fundamental review of the trading book news October 31, 2013 at 1:29 pm
The second consultative document on the fundamental review of the trading book is out: you can read it here. A few highlights:
- “The Committee remains sceptical that existing internal models-based risk measurement methodologies used by banks can adequately capture the risks associated with securitised products. As a result, capital charges for securitisation positions in the trading book – including correlation trading activities – will be based on the revised standardised approach”. RIP CRM models.
- “the Committee has decided that joint modelling of the discrete (default risk) and continuous (spread risk) components of credit risk is likely to involve particular practical challenges… As a result, the Committee has agreed that non-securitisation credit positions in the trading book will be subject to a separate Incremental Default Risk (IDR) charge”.
- “the Committee has decided that it is not appropriate for CVA to be fully integrated into the market risk framework.
- “the Committee has confirmed its intention to pursue two key reforms outlined in the first consultative paper: stressed calibration… [and] move from Value-at-Risk (VaR) to Expected Shortfall (ES)”.
- “The Committee’s approach to address the risks posed by varying market liquidity consists of two elements: First, incorporating ‘liquidity horizons’ in the market risk metric… [Second] capital add-ons against the risk of jumps in liquidity premia.
- “The Committee is taking a number of steps to strengthen the relationship between models-based and standardised approaches. First, it is establishing a closer link between capital charges resulting from the two approaches. Second, it will require mandatory calculation of the standardised approach by all banks. Third, it will require mandatory public disclosure of standardised capital charges by all banks on a desk-by-desk basis. Finally, the Committee is also considering the merits of introducing the standardised approach as a floor or surcharge to the models-based approach”.
It’s consultative, and you have until 31st January 2014 to get your comments in. Happy Christmas.