On January 11, 2016, the Basel Committee on Banking Supervision announced that its governing body, the Group of Central Bank Governors and Heads of Supervision, known as GHOS, endorsed the new market risk framework, which takes effect in 2019. The full text of the new framework will be published in the coming days. Improvements in the new risk framework include: (i) a revised boundary between the banking and trading books that will reduce scope for arbitrage; (ii) a revised internal models approach with more coherent and comprehensive risk capture; (iii) an enhanced model approval process and more prudent recognition of hedging and portfolio diversification; and (iv) a revised standardized approach that serves as a credible fall-back and floor to the model-based approach and facilitates more consistent and comparable reporting of market risk across banks and jurisdictions. The Basel Committee will also finalize its efforts to address the problem of excessive variability in risk- weighted assets by the end of this year. These efforts will include a proposal to remove the internal model approach for credit risk and limits on the use of internal models for credit risk (in particular, through the use of floors). The GHOS also agreed that the final design and calibration of the leverage ratio should be based on a Tier 1 definition of capital and should comprise a minimum level of 3%. Members also discussed additional requirements for global systemically important banks. The Basel Committee will finalize the calibration in 2016 to allow time for the leverage ratio to be implemented as a Pillar 1 measure by January 1, 2018.
The Bank for International Settlements press release is available at: http://www.bis.org/press/p160111.htm.
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