CMF Consults on Methodology to Determine Market Risk-Weighted Assets
CMF is consulting on a regulation that establishes a standardized methodology for determining the risk-weighted assets for market risk at banks. The regulation aims to improve internal capital management and risk coverage in the banking industry, in line with international standards and the recent amendment to the General Banking Act (LGB). CMF also published a regulatory report evaluating the impact of the proposal, along with a set of frequently asked questions and a presentation on the proposal. The consultation process will be open until August 31, 2020.
The new regulation in consultation is based on the Basel III simplified standard model for market risk management, which includes four types of risk—interest rates, foreign currencies, stock prices, and commodities. This consolidated approach considers the risk of stock prices and raw materials due to possible exposures that a bank's subsidiaries may have in such assets. Furthermore, a specific risk oriented to measure idiosyncratic aspects of the issuer is incorporated within the interest rate and stock exchange risks. All parameters presented in the standard in consultation were calibrated using updated information (1999-2018 for foreign currency risk and 2007-2018 for interest rate risk).
In March 2020, CMF had decided to postpone the implementation of Basel III requirements by one year and to maintain the current general regulatory framework for banking capital requirements until December 2021. CMF is postponing the implementation of the internal methodologies for measuring market risk-weighted assets to a date after the entry into force of these standards in the member countries of the Basel Committee (scheduled in January 2022). This is because CMF is expecting that international experience will be gained from the application of these methodologies in jurisdictions with more developed markets as well as from gradually implementing the new standards in Chile.
The General Banking Act empowers CMF to establish, through a general regulation and subject to a favorable agreement by the Central Bank of Chile, standardized methodologies to determine risk-weighted assets of banking companies. This measure covers relevant risks faced by such companies, including credit risk, market risk, and operational risk. Prior to the amendment to the General Banking Act in 2019, the calculation of risk-weighted assets for the determination of banks' capital requirements considered only the credit risk component. Market risk was managed through an exposure limit, whose estimation methodology is set in Chapter III.B.2.2 of the Compendium of Financial Regulation of the Central Bank of Chile.
Related Links
Comment Due Date: August 31, 2020
Keywords: Americas, Chile, Banking, Basel, Market Risk, Risk-Weighted Assets, General Banking Act, Regulatory Capital, Central Bank of Chile, CMF
Featured Experts
María Cañamero
Skilled market researcher; growth strategist; successful go-to-market campaign developer
Nicolas Degruson
Works with financial institutions, regulatory experts, business analysts, product managers, and software engineers to drive regulatory solutions across the globe.
Pierre-Etienne Chabanel
Brings expertise in technology and software solutions around banking regulation, whether deployed on-premises or in the cloud.
Previous Article
BoM Joins NGFS and Publishes Financial Stability ReportRelated Articles
HKMA Urges Early Action for Adherence to IBOR Fallbacks Protocol
HKMA urged authorized institutions to take early action to adhere to the IBOR Fallbacks Protocol, which ISDA is expected to publish soon.
FSB Sets Out Roadmap for Transition to Alternative Reference Rates
FSB published a global transition roadmap for London Inter-bank Offered Rate (LIBOR).
HM Treasury Publishes Response to Proposal on BRRD2 Transposition
HM Treasury published a document that summarizes the responses received from a consultation on the approach of UK to transposition of the revised Bank Resolution and Recovery Directive (BRRD2).
HM Treasury Publishes Response to Proposal on CRD5 Transposition
HM Treasury published the government response to the feedback received on the consultation for updating the prudential regime of UK before the end of the Brexit transition period.
PRA Updates Supervisory Statement on Counterparty Credit Risk
PRA published the final policy statement PS22/20, which contains the updated supervisory statement SS12/13 on counterparty credit risk.
FSB Publishes Update on Work to Address Market Fragmentation
FSB published an update on its work to address market fragmentation. FSB is working in this area in collaboration with the other standard-setting bodies.
EBA Proposes to Revise Guidelines on Incident Reporting Under PSD2
EBA proposed revisions to the guidelines on major incident reporting under the second Payment Service Directive (PSD2).
EBA Finalizes Standards for Prudential Treatment of Software Assets
EBA published the final draft regulatory technical standards specifying the methodology for prudential treatment of software assets by banks.
FSB Publishes Roadmap on Cross-Border Payments, Report on Stablecoins
FSB published a report presenting the roadmap to enhance cross-border payments by providing a high-level plan that sets ambitious but achievable goals and milestones in the five focus areas.
EIOPA Urges Insurers to Prepare for End of Brexit Transition
In a recent communication, EIOPA urged the insurance sector to complete its preparations for the end of the Brexit transition period on December 31, 2020.
