Basel ii Amendments - Banks against the
amended Basel
ii Framework Welcome to the April 2010 edition of the
Basel ii Compliance Professionals Association (BCPA)
newsletterDear
Members,Today we will
study the comments from Goldman Sachs on 'Revisions
to the Basel II market risk framework' and
'Guidelines for computing capital for incremental
risk in the trading book'.
We will also see that several European banks have a
similar approach. Main target: The Basel ii Market
Risk Amendment of 2009
Introduction
Accordint to the Bank of
International Settlements, since
the financial crisis began in mid-2007, an important
source of losses and of the build up of leverage
occurred in the trading book.
A main contributing factor was that
the current capital framework for market risk, based
on the 1996 Amendment to the Capital Accord to
incorporate market risks, does
not capture some key risks.
In response, the Basel Committee on
Banking Supervision (the Committee)
supplements the current value-at-risk based trading
book framework with an incremental risk capital
charge, which includes default risk as well as
migration risk, for unsecuritised credit products.
For securitised products, the
capital charges of the banking book will apply with a
limited exception for certain so-called correlation
trading activities, where banks may be allowed by
their supervisor to calculate a comprehensive risk
capital charge subject to strict qualitative minimum
requirements as well as stress
testing requirements.
These measures will
reduce the incentive for
regulatory arbitrage between the banking and trading
books. An additional response to the
crisis is the introduction of a
stressed value-at-risk requirement.
Losses in most banks’ trading books
during the financial crisis have been significantly
higher than the minimum capital requirements under the
former Pillar 1 market risk rules.
The Committee therefore requires
banks to calculate a stressed
value-at-risk taking into account a one-year
observation period relating to significant losses,
which must be calculated in addition to the
value-at-risk based on the most recent one-year
observation period.
The additional stressed
value-at-risk requirement will also help reduce the
procyclicality of the minimum capital requirements for
market risk.
Goldman Sachs comments on
'Revisions to the Basel II market risk framework'
and 'Guidelines for computing capital for
incremental risk in the trading book'“Revisions to the Basel II
market risk framework” (“MRF”) and “Guidelines for
computing capital for incremental risk in the trading
book” (“IRC Guidelines”)
13 March 2009 Basel Committee on Banking
Supervision Bank for International Settlements
Centralbahnplatz 2 CH-4002 Basel Switzerland
Dear Committee Members
The Goldman Sachs
Group, Inc. (“Goldman Sachs”) is pleased to have the
opportunity to provide comments on these two
consultative documents issued in January 2009 by the
Basel Committee on Banking Supervision (“the
Committee”).
In doing so, we would like to
express our appreciation of the efforts that have been
made by the Committee, and by the members of the
International Organization of Securities Commissions
(“IOSCO”), to develop these proposals, the importance
of which has been heightened by the financial crisis.
Goldman Sachs supports the
central principle underpinning the Basel 2 Framework:
a risk sensitive capital adequacy regime.
In particular we are fully
supportive of the Basel Committee’s stated goal of
arriving at “significantly more risk-sensitive capital
requirements that are conceptually sound”.
We believe the Basel Committee has moved away from
this underlying principle in these consultation
papers.
In particular we
are concerned that the new proposals will not address
the material tail risks which VaR is not designed to
capture and will stifle risk management
development. We recommend
a principles-based framework that will capture all
material tail risks and promote risk management
practice and modelling. We believe
that a principles-based framework would need to be
bolstered at the Supervisory level by a more rigorous
assessment and enforcement process that promotes
consistency of coverage of the material tail risks,
but that allows firms to adapt the methodology as
appropriate for their portfolios. We
support a level playing field but note that it has not
been recognised explicitly that some firms are already
holding capital to cover many of the risks identified
by the Basel Committee. It is
apparent from public disclosures, that different firms
report widely varying amounts of market risk-weighted
assets relative to reported VaR. This leads
us to the conclusion that some firms have been holding
capital to cover various risks that are not captured
by VaR models and that others have not. We believe
the Committee should acknowledge in its proposals and
in the Quantitative Impact Study that the starting
point is different depending on the firm and
jurisdiction. We are
concerned therefore that a firm such as Goldman Sachs,
which has been holding capital for many such risks
based on methodologies agreed with supervisors, will
be required to discard these methodologies in favour
of the standard rules set out in these proposals.
We believe
that the proposals do not address the event risks and
other material risks associated with securitisation
positions appropriately. We
understand that some firms’
models and add-ons did not capture the tail risks
observed during 2007/8, in particular where
firms were using public credit ratings to manage and
measure risk and capital. The
solution to this is not a
backwards step towards simplified approaches, but a
more forward-looking Basel 2 framework which requires
firms to hold capital for all material risks. We
believe that material event
risks cannot be captured in VaR, but
alternatively can be captured by suitable risk-based
methodologies (including add-ons), and that the
important aim is that there is sufficient capital to
cover these risks. Under the
current proposals (i.e. limited to credit ratings for
securitisation positions), material risks will
continue to be omitted from capital. We set out
the reasons for this below. We refute the common presumption
that capital under the Trading Book Framework is
necessarily lower than under the Banking Book
Framework.In certain
cases Trading Book positions can attract much higher
capital charges and we think this is not
inappropriate. In
particular, illiquid assets in the Trading Book should
attract more capital than the same position booked in
the banking book at historical cost. We explain our
thinking below. The
proposal to restrict netting to similar financial
instruments in the IRC framework will have a very
material impact on capital charges, and is incongruent
with the AIRB framework which requires firms to
consider exposure on an obligor basis. We suggest
that netting on an intra-obligor basis should be
permitted, and would be fully reflective of the way
positions are managed and hedged within the Trading
Book. Proposals relating to
Securitisation Exposures Tying to the Securitisation
Framework We
fundamentally disagree that
banking book securitisation risk weights should be
used to calculate trading book specific risk capital
requirements for the following reasons: -- Risk
weights are based on public credit ratings. This is not
risk sensitive – there are other dominant factors that
have driven price changes, in particular the risk
associated with the correlation structure. AAA-rated
ABSs attracting 7% risk weight are a good example of
how, under this method, capital would have been
inappropriate and unresponsive to changes in market
value, particularly where firms are marking to market.
The banking
book securitisation framework should apply only to
held to maturity securitisation positions recorded at
historical cost because the probability of default is
the key driver of their value. If trading
book securitisation positions are forced into a
ratings based framework, the resulting capital
requirements will not capture the price risks (or
potential changes in value) that ratings are not
designed to capture. -- Carving
out securitisation positions from a trading desk’s
portfolio will lead to an incoherent picture of the
risk, affecting capital charges for the portfolio in
an unpredictable way and resulting in varying and, in
some cases, potentially lower capital charges than
under the current framework. Risk
sensitivity should be the overriding principle of the
Basel Committee’s proposals – capital should be
aligned to the material risks in the portfolio. Dealer exemption We
strongly advocate the
re-insertion of paragraph 718 (xcv) that contains the
exemption language for firms whose positions are part
of market-making activity. Without this
exemption language, firms with significant correlation
trading business, or who offer tranched portfolio
protection to financial institutions, will experience
multiple fold increases in capital requirements not
commensurate with risk. The exemption
was inserted into the Basel 2 Framework in recognition
of the fact that firms with correlation books have
dynamically hedged portfolios that are re-valued on a
daily basis and are subject to active risk management.
It is not
appropriate to regard such portfolios as directional
portfolios (e.g. long only strategies that suffered
severe deterioration in value during the recent
financial events). Rather they
are portfolios which manage “correlation risk”. As such it is
correlation risk which needs to be appropriately
captured in the capital charge. Such
portfolios typically contain
bespoke tranche synthetic positions that are not rated
by external rating agencies. As such, most
positions are likely to be treated as equity tranches
and deducted from capital under these proposals, even
though there may be dynamic hedges in place or the
tranches may be unrated
mezzanine tranches. Whilst we do
not disagree that capital levels should be increased
for some firms’ portfolios with tranched exposures,
capital levels should not be set by the securitisation
framework which relies on public credit ratings
agencies that to date have not been rating synthetic
tranches, and anyway would only capture the default
probability. It has
become apparent that some firms that were net long
securitisation exposures and recorded significant mark
to market losses may have been relying on public
credit ratings to determine and manage the level of
risk in the portfolio.The proposals
should not compound this error by requiring all firms
to use public credit ratings for capital requirements
purposes as set out in the Securitisation Framework. Market
making activity in credit markets will be severely
disrupted by the proposed rules. We believe
that the Basel Committee should set a broader policy
objective of promoting active, liquid capital markets.Following on
from this, the proposals should steer clear of setting
capital requirements that are poorly aligned with
risk. Otherwise
there is a serious risk that
capital markets will suffer materially from a loss in
liquidity and price transparency, which will have
knock on effects on underlying debt liquidity and
prices. We fully
support the arguments in the ISDA/LIBA/IIF/IBFed
industry response that describe in more detail the
correlation trading business and why this exemption is
fundamental to dealers. Arbitrage
Furthermore, we believe that the
securitisation exposure proposals have the potential
to result in a perverse outcome for unhedged long
securitisation positions in the trading book which are
marked to market. The
combination of existing trading book specific and
general market risk charges together with recognition
of any losses on a mark-to-market basis will almost
certainly result in a larger impact to capital than if
the positions were held in the banking book. Applying
banking book charges will
incentivise banks to hold in the banking book
positions that are in fact held with trading intent.
Please see
comments below with respect to trading book versus
banking book classification. Backwards step We would
suggest a proper risk based measure that would take
into account more than just the capital charge derived
from a public credit rating. Properties of
such a measure would allow for some diversification
benefits, taking into account long and short
positions, both synthetic and physical. We note that
the UK FSA standard position
risk requirements for credit derivative positions are
considerably more risk sensitive than the Basel
proposals.
Incremental Risk Charge
(IRC) Reduced scope We are
disappointed that the
scope of the IRC has been reduced to cover default and
migration risks for positions that have specific
interest rate risk and instead would advocate
returning to the scope outlined in July 2008 (i.e. all
material price risks for all products except
non-default interest products, commodities and FX).
The reduced
scope is not forward looking.
We suggest a
high level principle that firms must capture material
price risks and to cover all positions including
securitisation positions. Non-VaR capital add-ons VaR does
not capture all risks. Therefore the
proposals should be underpinned with the key principle
that all material risks should be captured in capital,
through a combination of VaR and separate risk-based
add-ons. Separate event risk methodologies remain part
of the suite of risk management tools. We believe
the Committee should not want to distort VaR by
requiring it to cover risks which it is not designed
to do. Banks using
capital add-on methodologies must be able to
demonstrate that the capital is sufficient to capture
all material risks. Following
on from this, we are concerned by the re-addition of
the wording “capture event risk” in para 718(LXXXViii)
and by the continued deletion of para 718 (LXXXiX).
Together,
these amendments require firms to
capture event risk in VaR
models. We believe
this may not be possible in some cases and strongly
advocate that the Basel Committee should clarify that
it is necessary to ensure capital is sufficient to
capture event risk, but this does not necessarily mean
it will be covered within firms’ VaR models.
Many event
risks will be tail events not likely to be captured in
1 year historical data periods or within the
confidence intervals measured by VaR models.
Concentrations and lack of liquidity can result in
impacts to capital from tail events that would be
better captured by add-on type capital charges
designed to be calibrated to the potential impact on
the firm’s portfolio, and more in line with stress
testing techniques. We believe
this would address the Committee’s concern with more
clarity as well as, importantly, would be likely to
raise capital for the tail risks. Therefore we
would ask for 718 (LXXXiX) to be reinstated but amend
the words “internal capital assessment” to “additional
Pillar 1 capital charges” using a methodology to be
agreed between a firm and its regulator. Soundness standard Whilst
we agree that the trading book
should meet a safety and soundness standard equivalent
to that used for the banking book, we believe
that it is an absolutely fundamental requirement the
proposals explicitly recognise that trading book
positions should, in general, attract different
capital requirements compared to the same position
held in the banking book. Setting the
soundness standard to 99.9% 1
year is not the same as setting the same absolute
capital level for a given position regardless of where
it is booked. Trading Book Behaviour As a firm
with predominantly trading activity, we are
acutely aware of the importance
of strong risk management and measurement. In
particular, we see mark to market as a core
discipline, not just, as is more commonly perceived, a
“valuation methodology”. As such,
trading book positions are
subject to active management on a daily basis with
daily valuations. Traders and
risk managers make decisions based on this
information. Therefore
we believe there should be
explicit recognition that capital charges should be
different for the same position if booked in the
trading book rather than the banking book. Constant level of risk
assumption and Minimum liquidity horizon The
constant level of risk assumption is not adequate and
cannot apply to trading book positions. We do not
believe that a requirement to rollover positions to a
one year horizon is appropriate for the trading book,
since it does not reflect actual trading and risk
management practice, either in benign or stressed
environments. It is
clear that firms have been reducing trading positions
and have not been attempting to take on new risk
during the recent stressed period. For positions
that are illiquid, concentrated
and of low quality, capital charges should be
increased. However we
believe it is wholly
inappropriate and inconsistent with the evidence of
firms’ behaviour during the crisis, to presume that
firms will consciously increase trading risk in
stressed environments. Therefore
we propose that capital should
be set according to the applicable liquidity horizon
and to a soundness standard of 99.9%. In
combination, prescribed minimum liquidity horizons,
and the incongruent rollover to a single, arbitrary
horizon, will, perversely, deemphasise the illiquid,
low-rated and concentrated positions the Committee is
rightly most concerned about in the capital
calculation. Netting restrictions Basel has
proposed that netting should only be allowed where
positions refer to the same financial instrument, i.e.
intra-obligor netting is no longer permitted. This
requirement is burdensome and inconsistent with the
AIRB framework which requires firms to consider credit
exposures at the risk party level. Intra-obligor
offsets should be permitted but there should be an
explicit requirement that material basis risks should
be adequately capitalised. Trading book versus banking book We
strongly disagree with the
suggestions to treat Trading Book positions under the
Banking Book framework. On the
contrary, we would argue that
the Banking Book treatment is inferior given its
limitation to credit risk, coupled with less stringent
requirements to risk manage on a frequent and dynamic
basis. Positions
accounted for using fair value that would be treated
under the banking book framework would not require
capital for material price risks. In downturn
scenarios, where asset prices are depressed, banking
book capital requirements would be insufficient. Also
under the banking book approach, interest rate risk is
addressed in the Pillar 2 framework only and does not
necessarily require further capital. The banking
book framework should apply only to held to maturity
assets recorded at historical cost because the
probability of default is the key driver of the value
of such assets.
Therefore, we would suggest as
an alternative, that assets that are valued on a fair
value basis, but are booked in the banking book,
should be subject to forward looking capital charges
that capture the material price risks, and are not
limited to credit risk charges.Such a regime
should set capital requirements at a level higher than
positions held in the Trading Book because,
importantly, such positions carry all of the same
price risks but have none of the discipline required
under a rigorous risk management process in the
Trading Book. Factors that
are used to arrive at the fair value of an asset
should also be used in assessing the potential value
deterioration for the purpose of determining a
risk-based capital requirement This would be
consistent with Basel’s proposal to extend prudent
valuation guidance to all positions subject to fair
value accounting (para 9 of the MRF). Therefore any
asset marked at fair value should be subject to
capital charges that are aligned with the underlying
risk factors, regardless of whether the asset is
booked in the trading book or banking book. Only assets
that are held at historical cost (less impairment),
should be eligible for banking book treatment i.e.
treatment that only capitalises against the default of
the underlying name(s). The above
suggestion would need to be coupled with the increased
scope as set out above i.e. that all material price
risks for all trading book positions should be caught
by the Incremental Risk Charge. For example,
a less liquid tranched credit position, whether booked
in the trading book or banking book, will attract a
capital charge to cover default risk, migration risk,
interest rate risk and correlation risk. This would
clearly be a better outcome than
booking this in the banking book and attributing a 7%
risk weight to the position according to the default
risk only. Stressed
VaRPurpose
lacks clarityThe goal of
the stressed VaR additional capital requirement is not
clear. We do not
believe the proposals clarify whether it is intended
to address procyclicality or deficiencies in a firm’s
VaR model. If the
aim is to compensate for models which are not
sufficiently responsive to changes in market
conditions, we believe there are
better ways to address that concern. For example, the
plus factors for backtesting breaches could be
increased. There is
evidence which would suggest that firms with many
backtesting breaches also suffered severe losses in
their trading books over the recent period.
Alternatively, as the Committee itself has recognised,
some firms have used weighting schemes for historical
data to ensure that VaR models are more responsive to
changes in market conditions. Event risk
Importantly,
the stressed VaR measure does
not capture any of the tail risks which have been
central to market losses during the crisis. Tail events
need to be captured by an increased scope in the IRC
guidelines as set out above. We believe
the increased capital levels resulting from the
stressed VaR concept will provide a false sense of
security.Although
capital in the system will increase for trading book
positions, there is still clear potential for some
firms with less liquid and more risky (in terms of
tail risk) positions to continue to have insufficient
capital resources. Risk
insensitivity The Stressed
VaR concept will result in capital levels that are
much less responsive to changes in risk. As such we
believe the proposal is counter effective and
inconsistent with the core Basel principle of a risk
based capital framework. It is
important that a risk based capital measure should
capture and react quickly to risks. Without this,
the proposals do not incentivise good risk management
practice. Perverse
incentives The
Stressed VaR proposal
incentivises a lower core VaR number and a simpler
model. Models that
have a fast decay are more reactive and responsive to
a market stressed environment, and can lead to
increased capital requirements of 2-3 times compared
to benign economic environments. A stressed
VaR measure therefore has level playing field issues
in that firms with more reactive VaR measures will be
penalised more than firms with less reactive VaR
measures.
In closing, we wish to repeat our
support of the efforts of the Committee, and to
express our desire to assist the Committee in any way
that would be helpful. Yours
sincerely Robert Charnley cc. Ms
Norah Barger, Deputy Director, Division of Banking
Supervision & Regulation, Federal Reserve System Mr
Thomas McGowan, Assistant Director, Division of
Trading & Markets, Securities & Exchange Commission
Mr Paul Sharma, Director of Wholesale and Prudential
Policy, Financial Services AuthorityBasel ii in
the USA - It will take some time...Case StudyGoldman
SachsFORM 10-K:
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934 For the fiscal year
ended December 31, 2009 The Goldman Sachs Group, Inc.
Capital Requirements We are
subject to regulatory capital requirements
administered by the U.S. federal banking agencies.
Our bank
depository institution subsidiaries, including GS Bank
USA, are subject to similar capital requirements.Under the
Federal Reserve Board’s capital adequacy requirements
and the regulatory framework for prompt corrective
action (PCA) that is applicable to GS Bank USA,Goldman Sachs and its bank
depository institution subsidiaries must meet specific
capital requirements that involve quantitative
measures of assets, liabilities and certain
off-balance-sheet items as calculated under regulatory
reporting practices. Goldman Sachs
and its bank depository institution subsidiaries’
capital amounts, as well as GS Bank USA’s PCA
classification, are also subject to
qualitative judgments by
the regulators about components, risk weightings and
other factors. We report
capital ratios computed in accordance with the
regulatory capital requirements currently applicable
to bank holding companies, which are based on the
Capital Accord of the Basel
Committee on Banking Supervision (Basel
I). These ratios are used by the Federal
Reserve Board and other U.S. federal banking agencies
in the supervisory review process, including the
assessment of the firm’s capital adequacy. Our
Tier 1 capital consists
of common shareholders’ equity, qualifying preferred
stock and our junior subordinated debt issued to
trusts, less deductions for goodwill, disallowed
intangible assets and other items. Our total
capital consists of our Tier 1 capital and our
qualifying subordinated debt, less certain deductions.
Our total
capital ratio is equal to total capital as a
percentage of Risk-Weighted Assets (RWAs), which are
calculated in accordance with the Federal Reserve
Board’s risk-based capital requirements, and our Tier
1 capital ratio is equal to Tier 1 capital as a
percentage of RWAs. The
calculation of RWAs is based on the amount of the
firm’s market risk and credit
risk. Certain
measures included in the calculation of the firm’s
RWAs for market risk are under review by the Federal
Reserve Board. As of
December 2009, our total capital
ratio was 18.2%, and our Tier 1 capital ratio was
15.0%.
We are
currently working to implement the requirements set
out in the Revised Framework for the International
Convergence of Capital Measurement and Capital
Standards issued by the Basel Committee on Banking
Supervision (Basel II) as applicable to us as a bank
holding company. U.S.
banking regulators have incorporated the Basel II
framework into the existing risk-based capital
requirements by requiring that internationally active
banking organizations, such as Group Inc.,
transition to Basel II over
several years. During a
parallel period, we
anticipate that Group Inc.’s capital calculations
computed under both the Basel I rules and the Basel II
rules will be reported to the Federal Reserve Board
for examination and compliance for at least four
consecutive quarterly periods. Once the
parallel period and subsequent three-year transition
period are successfully completed, Group Inc. will
utilize the Basel II framework as its means of capital
adequacy assessment, measurement and reporting and
will discontinue use of Basel I. The Basel II
framework was implemented in several countries during
the second half of 2007 and in 2008, while others
began implementation in 2009. The
Basel II rules therefore already
apply to certain of our operations in non-U.S.
jurisdictions. The
Federal Reserve Board also has established minimum
leverage ratio requirements. The Tier 1
leverage ratio is defined as Tier 1 capital under
Basel I divided by adjusted average total assets
(which includes adjustments for disallowed goodwill
and certain intangible assets). The minimum
Tier 1 leverage ratio is 3% for bank holding companies
that have received the highest supervisory rating
under Federal Reserve Board guidelines or that have
implemented the Federal Reserve Board’s risk-based
capital measure for market risk. Other bank holding
companies must have a minimum Tier 1 leverage ratio of
4%. Bank holding
companies may be expected to maintain ratios well
above the minimum levels, depending upon their
particular condition, risk profile and growth plans.
As of
December 2009, our Tier 1 leverage ratio under Basel I
was 7.6%.European banks against the Basel
ii Market Risk Amendment European Association of Public
Banks European Association of Public Banks and
Funding Agencies AISBL
Avenue de la Joyeuse Entrée 1 – 5, B-1040 Brussels
The European
Association of Public Banks (EAPB) represents the
interests of 32 public banks, funding agencies and
associations of public banks throughout Europe, which
together represent some 100 public financial
institutions. The latter have a combined balance sheet
total of about EUR 3,500 billion and represent about
190,000 employees, i.e. covering a European market
share of approximately 15%.EAPB
comments on the Basel Committee’s consultation on
“Guidelines for computing capital for incremental risk
in the trading book” and “Revisions to the Basel II
market risk framework”Basel Committee on Banking
Supervision Bank for International Settlements
CH-4002 Basel, Switzerland
The EAPB is grateful
for the opportunity to comment of the two consultation
papers “Revisions to the Basel II market risk
framework” (CP 148) and “Guidelines for computing
capital for incremental risk in the trading book” (CP
149). We would like
to provide our response in the following. Before we
comment on the changes presented in the two papers in
detail, we would like to start with a few basic
comments. General comments Unintended
side-effects Against the background of the
most recent financial market turbulences, we can in
principle understand the efforts made by the
regulatory authorities to increase capital
requirements in order to cover market risks and
additional risks in the trading book. However,
in the future, capital requirements should also be in
line with risks assumed by the banks. From the point of view of the
credit services sector, comprehensive efforts are
already being made in broad areas of internal risk
management to counteract the causes and effects of the
financial market crisis. We are of the
opinion that a revision of a bank’s specific situation
has clear advantages over a global increase of own
funds prescribed by regulators.
Furthermore, a synchronised balance between the models
used internally by banks in future and the regulatory
requirements ("use test") should be ensured. The (further)
development of models must not
be restricted by rigid regulatory requirements,
particularly in the area of measuring incremental
risks, for which no market standards currently exist.
Banks prefer
to implement risk models, as these are more flexible
and appropriate for their individual risk profile and
portfolio configuration. With
inflexible regulatory model requirements, which are
primarily conservative in nature, the advantages of an
internal model will be lost. The incentive of risk control on
the basis of a bank-specific model would therefore be
significantly reduced. In this
respect, we still have doubts about whether it is
possible to fulfil the use-test requirements on the
basis of the specifications in the third consultation
paper.
Assessments by the credit services sector show that
the proposed regulatory requirements for the modelling
of incremental risks and the introduction of the
stress VaR would result in a huge in-crease in capital
charges for the trading book, irrespective of the
portfolio. This multiplication of the
capital charges would
also lead to secondary effects. According to
our assessment, the capital-orientated incentive of
transferring from market risk standard procedures to
model procedures will thus be negated by the
increasing capital charges for the latter method. This
will make internal further
development and the regulatory use of risk models
unattractive. This
would also result in an
incentive to not include and manage risk positions in
the trading book but to allocate these to the banking
book wherever possible. This is particularly evident in
the example of securitisation positions: Our
understanding of Item 38 is that the capital
charges for securitisations in the trading book must
effectively be determined on the basis of the banking
book regulations. However, as
such items are also to be taken into account in the
standard VaR general market risk (must rule) and, if
applicable, in the standard VaR specific risk (can
rule) and the stress VaR (must) for the capital
requirements, apparently desired arbitrage incentives
arise which benefit the banking book. A lack of
incentives for trading book activities does not only
have an effect on the bank itself. In general,
the development of these incentives could lead to
fewer market participants with the consequence that
higher margins could be imposed in less liquid
markets, thus increasing the costs for many financial
service providers. The
distortions in the market lead to arbitrage
opportunities, which could have a negative effect on
market prices. Time schedule
We welcome the extension of the implementation
deadline compared to the second consultation paper. We
would nevertheless like to draw the attention of the
Basel Committee to the
differences in terms of content and deadlines between
the Basel provisions on the one hand and the currently
valid European and national regulations for the
management of incremental risks on the other hand.This
uncertainty regarding how
national regulators will handle discrepancies
must not result in any disadvantages for the banks. At the same
time, the extension of
the implementation deadline should also be made use of
in order to complete the discussions still to be held
without excessive time pressure and with the
appropriate care. Hasty decisions must be avoided
at all costs due to the comprehensive internal model
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Professionals
2. Compliance
Professionals 3. Sarbanes
Oxley
Professionals 4. Basel
ii
Professionals 5. Solvency
ii
Professionals 6. Hedge
Funds
Professionals 7. Members of the Board
of Directors
Dear
members,
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