Basel eases capital hit from new trading book rules for banks

ECB President Draghi speaks during a news conference at ECB headquarters in Frankfurt
FILE PHOTO: European Central Bank (ECB) President Mario Draghi speaks during a news conference at ECB headquarters in Frankfurt, Germany December 13, 2018. REUTERS/Kai Pfaffenbach

January 14, 2019

By Huw Jones

LONDON (Reuters) – Revisions to global rules for bank trading books will result in a halving of the extra capital needed from January 2022 to cover risks from market price swings, the Basel Committee said on Monday.

It marks a completion of a welter of changes introduced by Basel since taxpayers had to bail out undercapitalised lenders during the financial crisis a decade ago.

Banks had lobbied heavily to persuade the Swiss-based group of banking supervisors from the world’s main financial centers to water down the original plans for new capital requirements for trading books.

Basel said in a statement that its oversight body, the Governors and Head of Supervision, chaired by European Central Bank President Mario Draghi, endorsed the revisions on Monday.

The new rules will mean an average increase of about 22 percent in total market risk capital requirements for banks compared with existing rules. A framework published in 2016 would have resulted in a 40 percent hike.

The change in overall capital held by most banks will be relatively modest, however, though some of the giant trading banks will suffer a bigger hit.

The bulk of a bank’s capital requirements cover the threat of souring loans, while market risk capital is far lower, at about 5 percent of the total.

Basel revised its market risk capital rules after getting better data from banks so that regulators could ease the initially conservative approach they took in the draft rules.

Basel Committee Secretary General William Coen said last April that regulators were being left with only a small sample of observations to make revisions.

(GRAPHIC: Basel market risk graphic –

A key change has been to ease a test which decides if a bank can use its own computer model to add up market risks for determining capital requirements, or must use a model set out by regulators.

In house models tend to be more refined and result in lower capital requirements than the standard regulatory “approach”.

The final rules, also known as the fundamental review of the trading book or FRTB, ease what was seen as a harsh pass or fail test by including a much broader “amber zone” than originally proposed, giving more wriggle room for banks to correct deficiencies.

Regulators want banks to better capture risks from assets like stocks, bonds and derivatives held on their trading books, such as illiquidity, or assets becoming harder to offload to replenish safety buffers in turbulent markets.

(Reporting by Huw Jones, editing by Ben Martin and David Evans)

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