Regulations

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.

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.