Impact of revised market risk framework

Impact of revised market risk framework

A revised market risk framework is due to be implemented from January 2019.


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The Basel Committee agreed a revised market risk framework in January 2016. This is due to be implemented from January 2019 (possibly later in the EU). The latest Basel Committee monitoring report (PDF 1.57 MB) on meeting Basel 3 requirements includes an analysis of the potential impact on banks of this framework.

The analysis shows that had the revised market risk framework been applied at end-June 2016 then G-SIBs would have faced a 76% (weighted average) increase in their minimum capital requirements for market risk. The positions of individual banks are widely dispersed, with the largest increase for a G-SIB being a 387% increase in market risk capital requirements, and the largest reduction for a G-SIB being 40%. The largest impacts arise from the revisions to the standardised approach to market risk.

Because, for most banks, the share of market risk within total risk-weighted exposures is relatively small (less than 10 percent), increases in market risk capital requirements have a relatively small impact on banks' overall capital requirements. This is the case for Irish institutions.The weighted average for G-SIBs is a 3.4% increase in total minimum capital requirements (percent, not percentage points, is equivalent to a 30 basis point reduction in CET1 capital ratios). The largest impact on any individual G-SIB is a 21.5% increase in total minimum capital requirements (equivalent to a 2 percentage point reduction in this bank’s CET1 capital ratio).

A different way of considering this overall impact on G-SIBs is that, before the (potential) impact of the revised market risk framework G-SIBs had (et end-June 2016) roughly €21 trillion of total risk-weighted exposures, €2.5 trillion of CET1 capital and a CET1 capital ratio of 11.8%. Market risk-weighted exposures accounted for around €1 trillion, so 5% of total risk-weighted exposures. A 76% increase in market risk exposure equates to an increase of around €0.76 trillion in market (and total) risk-weighted exposures, and a reduction in the G-SIBs average CET1 capital ratio from 11.8% to 11.5%.

The note suggests that the end-result may be a smaller increase in capital requirements, as (a) banks may be reporting on the basis of the standardised approach until they receive supervisory approval to use internal models for specific trading desks, and (b) banks are likely to change their overall trading book positions in response to the revised market risk framework (however, many banks have already scaled back their trading activity, so in that sense the impact has been greater than measured here).

The analysis also includes data for Group 1 (large internationally active banks, including G-SIBs) and Group 2 (smaller) banks. The results are broadly similar to those for G-SIBs. Not surprisingly, the impact on market risk capital requirements is larger for Group 2 banks (because they are more likely to be on the standardised approach) but this then translates into a smaller impact on overall capital requirements (because these banks tend to have less market risk relative to their overall risk exposures).

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