Supervisory framework for measuring and controlling large exposures

General Information

Subject: Supervisory Framework for Measuring and Controlling Large Exposures. Author: Basel Committee on Banking Supervision. Date: 2014. Scope: Capital requirements for market risk in the banking sector.

Executive Summary

- The document addresses capital requirements for market risk within the fundamental review of the trading book.

- It is crucial as it aims to strengthen the resilience of the banking sector after the financial crisis.

- Key findings include the need for a coherent regulatory framework and the recognition of internal risk transfers between the banking book and the trading book.

- Conclusions emphasize the importance of a standardized approach for calculating capital requirements while considering banks' operational concerns.

- Recommendations include adopting a sensitivity-based approach for calculating capital requirements and the need for feedback on the proposals.

Context and Objectives

- This document was drafted as part of the review of capital requirements for market risk following the financial crisis.

- The central issue is to ensure that banks maintain adequate capital levels to address market risks.

- Key challenges include the need for a harmonized regulatory framework at the international level and the prevention of regulatory arbitrage.

- The objective is to propose refinements to existing approaches to better manage market risks.

Summary of Key Points

- **Internal Risk Transfers**: The document proposes a treatment of internal risk transfers between the banking book and the trading book, recognizing their role in risk management while avoiding capital arbitrage.

- **Revised Standardized Approach**: A sensitivity-based approach is recommended for calculating capital requirements, replacing a cash flow-based method deemed too complex.

- **Liquidity Risk**: The framework includes liquidity horizons to assess liquidity risk, with adjustments for internal models.

- **Market Risk**: The need for a consistent approach to the treatment of market risks, including basis risk, is emphasized.

Key Findings and Insights

- Internal risk transfers can be recognized as risk mitigants, but only under certain conditions to avoid capital arbitrage.

- The sensitivity-based approach should reduce implementation costs for banks.

- Concerns regarding the complexity of liquidity models have been addressed, leading to a simplified approach.

- The results of quantitative impact studies (QIS) have been integrated to refine the proposals.

Conclusions and Recommendations

- The document concludes on the necessity of adopting the proposed refinements to improve market risk management.

- Recommendations include implementing a standardized approach for calculating capital requirements and the importance of gathering feedback on the proposals before finalization.