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The Basel Committee issues revised standards for Interest Rate Risk in the Banking Book

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On April 21st 2016 The Basel Committee on Banking Supervision (BCBS) issued the final standards for Interest Rate Risk in the Banking Book (IRRBB). The revised standards consist of supervisory expectations for banks’ identification, measurement, monitoring and control of IRRBB as well as their supervision. The key enrichments to the 2004 Principles include: Broader instructions for a banks’ IRRBB management process in areas such as the improvement of interest rate shock scenarios, as well as crucial behavioral and modelling expectations that need to be considered by banks when measuring IRRBB; Augmented conditions to boost consistency, transparency and comparability when measuring and managing IRRBB. The requirements include quantitative disclosure conditions based on prevalent interest rate shock scenarios; A modernised and regulated framework which allows supervisors to command banks to follow or adopt; and Rigorous guidelines for identifying outlier banks, which have reduced 20% of a bank’s total capital to 15% of a bank’s Tier 1 capital. The primary objection of the issued standards is to make changes in the 2004 Principles market and supervisory practices which are particularly relevant for the current low interest risk rates. The revised standards are expected to be implemented in 2018.

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Basel Committee issues proposed revisions to the operational risk capital framework

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On March 4th 2016, the Basel Committee on Banking Supervision (BCBS) specified the proposed alternations to the operational risk capital framework, also known as the new Standardised Approach (SMA). The SMA is part of BCBS’s consultation paper which has been issued in October 2014. The suggested alternations of the operational risk capital framework are aimed at achieving BCBS’ broad objectives of balancing simplicity, comparability and risk sensitivity. The changes are necessary to make a step towards completing the post-crisis reforms of the current year. The objectives of the proposals are necessary, but they will have a neutral impact on overall capital requirements of most banks. BCBS recommends simplifying the regulatory framework by replacing three existing standardised approaches for calculating operational risk capital, as well as the Advanced Measurement Approach (AMA). Besides the regulatory framework, the risk-sensitive framework that combines financial statement-based measures of operational risk with an individual firms’ past operation losses have to be strengthened. Finally, the AMA needs to be discharged. Removing this framework will lead to a less complex modelling of the operational risk for regulatory capital purposes and less variable in risk weighted assets and insufficient levels of capital.

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European Commission extends the application date for the MiFID II package by one year

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On February 10th, 2016 the European Commission has proposed national competent authorities and market participants one additional year to comply with the rules set out in the revised Markets in Financial Instruments Directive (MiFID). The new deadline is January 3th 2018. MiFID was created in response to the financial crisis. The program provides harmonised regulation for investment services across the financial market, investment intermediaries and trading venues in the European Union. MiFID also commissions financial markets to be more efficient, resilient and transparent. However, an extension of MiFID II was necessary because the program has demonstrated that it features a complex infrastructure. The European Securities and Markets Authority (ESMA) also notified the European Commission that neither competent authorities, nor market participant, will have the necessary systems ready by January 3th 2017, the date by which the MiFID II package was initially scheduled to become operational. The unforeseen postponement will not impact the timeline for the adoption of the ‘level II’ measures of MiFID II/MiFIR. The European Commission will proceed with their adoption irrespective of the new date of entry into application of MiFID II.

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Revised Market Risk Framework published

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The BIS has published on January 14th, 2016 the revised market risk framework,  also referred to as Fundamental Review of the Trading Book (FRTB). The 2007-2008 period of severe market stress exposed weaknesses in the framework for capitalising risks from trading activities. In 2009, the Committee introduced a set of revisions to the Basel II market risk framework to address the most pressing deficiencies. A fundamental review of the trading book was also initiated to tackle a number of structural flaws in the framework that were not addressed by those revisions.This has led to the revised market risk framework, which is a key component of the Basel Committee’s reform of global regulatory standards in response to the global financial crisis. The purpose of the revised market risk framework is to ensure that the standardised and internal model approaches to market risk deliver credible capital outcomes and promote consistent implementation of the standards across jurisdictions. The final standard incorporates changes that have been made following two consultative documents published in October 2013 and December 2014 and several quantitative impact studies. The key features of the revised framework include: A revised boundary between the trading book and banking book A revised internal models approach for market risk A revised standardised approach for market risk A shift from value-at-risk to an expected shortfall measure of risk under stress Incorporation of the risk of market illiquidity The revised market risk framework comes into effect on 1 January 2019. More information can be found on http://www.bis.org/bcbs/publ/d352.htm.

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ESMA consults on MIFID II standards regarding trading suspensions, data service providers and derivatives reporting

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The European Securities and Markets Authority (ESMA) has published on August 31st, 2015 a consultation paper (CP) on the remaining draft implementing technical standards (ITS) under MiFID II on which ESMA has not yet consulted. This CP covers the following: (1) the suspension and removal of financial instruments from trading on a trading venue, (2) the notification and provision of information for data reporting services providers (DRSPs) and (3) the weekly aggregated position reports for commodity derivatives, emission allowances and derivatives thereof. This consultation runs until 31 October 2015. ESMA will use the input received to finalise its draft implementing technical standards which will be sent for endorsement to the European Commission on 3 January 2016. MiFID II/ MiFIR and its implementing measures will be applicable from 3 January 2017.

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Review of the Credit Valuation Adjustment (CVA) risk framework – consultative document

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A Review of the Credit Valuation Adjustment Risk Framework is being undertaken by the Basel Committee. The objectives of the review are to (i) ensure that all important drivers of credit valuation adjustment (CVA) risk and CVA hedges are covered in the Basel regulatory capital standard; (ii) align the capital standard with the fair value measurement of CVA employed under various accounting regimes; and (iii) ensure consistency with the proposed revisions to the market risk framework under the Basel Committee’s Fundamental review of the trading book. The Basel III capital framework already establishes a minimum capital charge to capture the potential mark-to-market losses faced by a bank from the deterioration in a counterparty’s creditworthiness. This capital treatment addresses any variability in CVA that arises due to changes in credit spreads but does not take account of variability arising from daily changes in market risk factors (ie account exposure variability). This consultative paper envisages a CVA risk framework that takes into account the market risk exposure component of CVA along with its associated hedges. The regulatory capital requirement for CVA risk would be based on exposure models that banks also use to determine their accounting CVA, subject to conditions intended to reduce potential variability due to risk-weighted asset (RWA) calculations or remaining discrepancies in financial reporting practices across banks and jurisdictions. For a broad range of internationally active banks, accounting CVA is fair-valued through the profit and loss (P&L) account and is sensitive to the same risk factors as instruments held in the trading book. The consultative paper therefore proposes an internal models approach and a standardised approach for CVA risk that have been adapted from the revised market risk framework under the Committee’s Fundamental review of the trading book. A basic approach for CVA risk is also proposed for banks that are less likely to regularly compute CVA sensitivities to a large set of market risk factors, owing to the nature of their trading operations. The consultation document can be found here.

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Basel Committee consults on interest rate risk in the banking book

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The Basel Committee on Banking Supervision has issued in June 2105 a consultative document on the risk management, capital treatment and supervision of interest rate risk in the banking book (IRRBB). This consultative document expands upon and is intended to ultimately replace the Basel Committee’s 2004 Principles for the management and supervision of interest rate risk. The Committee’s review of the regulatory treatment of interest rate risk in the banking book is motivated by two objectives: First, to help ensure that banks have appropriate capital to cover potential losses from exposures to changes in interest rates. This is particularly important in the light of the current exceptionally low interest rate environment in many jurisdictions. Second, to limit capital arbitrage between the trading book and the banking book, as well as between banking book portfolios that are subject to different accounting treatments. The Committee is seeking comments on the proposed approaches, which share a number of common features. The full report can be found here.

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EBA publishes results of the Basel III monitoring exercise

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The European Banking Authority (EBA) published today its eight report of the Basel III monitoring exercise on the European banking system. This exercise, run in parallel with the one conducted by the Basel Committee on Banking Supervision (BCBS) at a global level, allows the gathering of aggregate results on capital ratios and leverage ratio (LR), as well as on liquidity ratios – liquidity coverage ratio (LCR) and net stable funding ratio (NSFR) – for banks in the European Union (EU).  

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