Critical Analysis of the New Basel Minimum CapitalRequirements for Market Risk

In its October 2013’s consultative paper for a revised market risk framework (FRTB), and subsequentversions published thereafter, the Basel Committee suggests new ways of dealing with market risk inbanks’ trading and banking books. The Basel Committee estimates that the new rules will result in anapproximate median capital increase of 22% and a weighted average capital increase of 40% [1],compared with the current framework. Key changes can be found in the internal model approach, in thestandard rules and in the scope/approval process. Among the significant changes that are beingintroduced by the FRTB is a stricter separation of the trading book and banking book. Regardless ofwhether they use standardised or internal models, banks will need to review their portfolios to determineif existing classifications of instruments and desks as trading book or banking book are still applicable orwhether a revision of desk structure is needed. In this article, we analyse the theoretical foundations ofthe internal model approach (IMA), which are the stressed expected shortfall, liquidity adjustments,default & migration risk and non-modellable risk factors. We thoroughly investigate the criticisms forInternal Risk Model (IMA) and the introduction of a standardised floor, the sensitivity based approach(SBA) with Delta, Vega and Curvature, shock scenarios and the aggregation with asymmetriccorrelation and reflection of basis/default risk.

کلیدواژه ها:

Fundamental Review of the Trading Book ، IMA ، Revised Standardized Model ، Factor Models ، Risk Contribution