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Agencies Issue Final Rule on Risk-Based Capital Standards: Market Risk
June 19 - The federal bank regulatory agencies have jointly issued a final rule modifying the risk-based capital standards for market risk. The final rule incorporates improvements to the current trading book capital regime as proposed by the Basel Committee on Banking Supervision in Revisions to the Basel II Market Risk Framework published in July 2009 and The Application of Basel II to Trading Activities and the Treatment of Double Default Effects, published in July 2005.
The final rule:
- Establishes more explicit eligibility criteria than the current market risk capital rules for positions that receive market risk capital treatment; sets requirements for prudent valuation, robust stress testing and the control, oversight and validation mechanisms for models; and requires banks to have an internal capital adequacy assessment for market risk.
- Introduces a stress-value-at-risk requirement, which better captures market risk during periods of stress.
- Introduces an incremental risk charge, which captures default and migration risks at a 99.9 percent confidence level over a one-year horizon.
- Introduces a risk-based capital charge for correlation trading positions.
- Removes references to external ratings from the standardized specific risk capital charges consistent with Section 939A of the Dodd-Frank Wall Street Reform and Consumer Protection Act.
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