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April 25, 2018

During the keynote speech at the ISDA Annual General Meeting, William Coen, the Secretary General of BCBS, discussed the market risk framework, which is the one element of the post-crisis reform agenda has yet to be fully finalized. He mainly answered three questions: why has BCBS revised the market risk framework, why has it taken so long to complete, and how do we get the framework finished in a timely manner?

According to him, one reason for revisions is that the pre-crisis market risk framework was in need of major repair. The weaknesses exposed by the crisis revealed the shortcomings in banks’ own risk management practices and the limitations of models in general. The review sought to address shortcomings in the regime’s design as well as weaknesses in risk measurement under both the internal models-based and standardized approaches, including the trading book/banking book boundary, incorporating the risk of market illiquidity, enhancing the robustness and risk-sensitivity of the standardized approach, and capitalizing against tail risk. As part of finalizing the Basel III framework last year, ongoing challenges in implementing certain bank capital reforms were acknowledged by the Group of Governors and Heads of Supervision (GHOS), the Committee’s oversight body. Accordingly, the GHOS endorsed the Committee's proposal to extend the implementation date of the revised market risk framework from 2019 to January 01, 2022 (for both the implementation and first regulatory reporting date for the revised framework). Deferring its implementation will also align the framework’s starting date with those of the Basel III revisions for credit risk and operational risk. It will give banks more time to develop the systems needed to apply it.

He also stressed the importance of having a framework that can be realistically implemented by banks and jurisdictions. In postponing its implementation date, GHOS members reaffirmed that they expect the framework’s full, timely, and consistent implementation. To meet this expectation, the framework needs to be designed in a way that can be implemented by internationally active banks and adequately overseen by supervisors. While there may be sound conceptual reasons for pursuing a specific approach or making a particular revision to the market risk framework, it is in no one’s interest to end up with a framework that cannot be adequately implemented. He also added that the Committee’s experience with its market risk quantitative impact study (QIS) is “telling.” The Committee has conducted many quantitative exercises on market risk, both before and after the publication of the market risk framework, with a QIS exercise currently under way. While the quality of data submitted by banks has improved over time, data quality concerns remain. Thus, a significant proportion of bank data has been excluded from the Committee’s analysis. These deficiencies may simply reflect the gradual adjustment of banks’ systems to the revised framework. Consequently, the Committee has in some areas been left with a small sample of observations to finalize certain outstanding revisions. This points to the importance of banks providing complete and robust trading book data submissions for the current QIS exercise as well as providing concrete evidence to the questions posed in the consultation to facilitate the standard’s finalization.

An important consideration for the Committee is whether the framework adequately balances simplicity, comparability and risk sensitivity. The Committee will need to consider whether simpler and more robust approaches should be included in the revised market risk framework. In conclusion, he also emphasized that there is a clear expectation for full, timely, and consistent implementation of the Basel III standards. This includes the January 01, 2022 implementation date of the market risk framework, as reaffirmed last month by the G20 Finance Ministers and Central Bank Governors. “The Committee will increasingly be focused on meeting this expectation, ” said Mr. Coen.


Related Link: Speech

Keywords: International, Banking, Market Risk, Basel III, BCBS

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