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«Analysis of the trading book quantitative impact study October 2009 Copies of publications are available from: Bank for International Settlements ...»

-- [ Page 1 ] --

Basel Committee

on Banking Supervision

Analysis of the trading

book quantitative impact

study

October 2009

Copies of publications are available from:

Bank for International Settlements

Communications

CH-4002 Basel, Switzerland

E-mail: publications@bis.org

Fax: +41 61 280 9100 and +41 61 280 8100

This publication is available on the BIS website (www.bis.org).

© Bank for International Settlements 2009. All rights reserved. Limited extracts may be reproduced or translated provided the source is stated.

ISBN print: 92-9131-805-1 ISBN web: 92-9197-805-1 Contents

1. Summary of key findings

2. Scope of exercise and sample of banks

3. Overview of results

4. Incremental risk capital charge

5. Stressed value-at-risk

6. Re-securitisation capital charges

7. Equity specific risk

Annex: Calculation of capital requirements for market risk

Glossary

i Analysis of the trading book quantitative impact study Analysis of the trading book quantitative impact study In early 2009, the Basel Committee’s Trading Book Group (TBG) conducted a study to assess the quantitative impact of proposed revisions to Basel II’s market risk framework.

These proposals were published in January 2009 1 and subsequently adopted by the Committee in July 2009. Please refer to the attached Annex and Glossary for further information on the calculation of capital requirements for market risk and a description of certain terms used in this paper.

The scope of the exercise included assessing the impact of:

• the capital charge for incremental risk, 2 • the stressed value-at-risk (VaR) capital charge, • the capital charges for securitisation exposures in the trading book and • the revised specific risk capital charge for certain equity exposures under the standardised measurement method.

The Committee will conduct an impact study in 2010 which will focus on correlation trading activities. On the basis of the results of that study, the Committee will evaluate a floor for the comprehensive risk capital charge which could be expressed as a percentage of the charge applicable under the standardised measurement method.

Section 1 of this paper provides a brief summary of the key findings. Section 2 discusses the sample of banks used in the study. Section 3 presents the overall results. The paper presents detailed results regarding the incremental risk capital (IRC) charge (Section 4), stressed value-at-risk (Section 5), securitisation (Section 6) and specific risk capital charges for equities subject to the standardised measurement method (Section 7).

Throughout this paper, findings are presented and discussed with summary tables that employ a high degree of aggregation so as not to reveal firm-specific information.

Furthermore, the discussion of the results often refers to the average capital impact of a given capital proposal. While the average is a useful summary statistic it is important to realise that there is often significant heterogeneity in the results. All tables also present results on the median impact as well as the standard deviation. While these statistics are not always explicitly discussed they should be considered carefully when interpreting the results of this analysis.

1. Summary of key findings This impact study includes data from 43 banks across 10 countries. Key findings from the

study are as follows:

Basel Committee on Banking Supervision, Revisions to the Basel II market risk framework, consultative document, January 2009.

Please see the Glossary for an explanation of technical terms and the Annex for details regarding the calculation of capital requirements for market risk under the new and the previous market risk frameworks.

Analysis of the trading book quantitative impact study 1. The results of the impact study indicate an average (median) increase of at least 11.5% (3.2%) of overall capital requirements and of 223.7% (102.0%) of market risk capital requirements. 3 This excludes any capital charges for securitisation exposures which are not re-securitisations under the standardised measurement method or the comprehensive risk capital charge. The overall average includes banks which did not report data on all aspects of the revisions so that the changes in capital requirements for some items in the calculation of the overall change in capital requirements had to be assumed to be zero. Therefore, the actual change in minimum capital requirements will likely be higher.

2. The incremental risk capital charge results in an average (median) increase of overall capital requirements of 6.2% (3.6%). Expressed in terms of market risk capital requirements, the incremental risk capital charge results in an average (median) increase of 102.7% (60.4%). Relative to the specific risk surcharge, the incremental risk capital charge is on average nine times as high. The results from this impact study are consistent with the results of the second impact study.

3. The introduction of stressed VaR results in an average (median) increase of overall capital requirements of 4.6% (2.7%). Expressed in terms of market risk capital requirements, the increase is 110.8% (63.2%). On average, the stressed VaR was





2.6 times the non-stressed VaR. There is no evidence that the stressed VaR exhibits less diversification benefits than the non-stressed VaR.

4. The introduction of new standardised specific risk capital charges for resecuritisation exposures results in an average (median) increase in overall capital requirements of 5.4% (0.1%). Expressed in terms of market risk capital requirements the average (median) increase will be 92.7% (1.8%).

5. The capital charges for equity specific risk under the standardised measurement method result in an average (median) increase of overall capital requirements of 0.2% (0.1%). Expressed in terms of market risk capital requirements, the average (median) increase is 4.9% (1.9%).

2. Scope of exercise and sample of banks The scope of the exercise included the capital charge for incremental risk, the stressed VaR capital charge, the capital charge for securitisation exposures in the trading book and the revised specific risk capital charge for certain equity exposures under the standardised measurement method. Due to the timing of the study, it does not yet reflect the changes made in the final Revisions to the Basel II market risk framework published in July 2009 regarding the treatment of banks’ correlation trading activities. Therefore, the capital charges for securitisation exposures have been excluded in this analysis, although resecuritisation exposures are included. The Committee’s impact study in 2010 will focus on correlation trading activities. On the basis of that study, the Committee will evaluate a floor for the comprehensive risk capital charge which could be expressed as a percentage of the charge applicable under the standardised measurement method.

The current market risk capital requirements have been calculated based on the data reported for 31 December 2008. However, they have been adjusted by replacing the VaR at the reporting date by the VaR of a more conventional market period such as 31 December 2006 if this was reported by the bank. This better reflects the long-term impact on market risk capital requirements.

2 Analysis of the trading book quantitative impact study Overall, 43 banks contributed data to the impact study. Not all banks provided data on all the aspects covered. While all but five banks provided data on the stressed VaR capital requirement, only 25 banks provided an estimate of the incremental risk capital charge and 28 provided data on the impact of the capital charge for securitisation exposures.

Since national supervisors mainly asked large, internationally active banks to participate in the study, only 12 participating banks calculated the impact of the revised capital charge for certain equity exposures under the standardised measurement method. Most banks in the sample use the internal models approach to market risk, and therefore this change will not be relevant for them or it will apply only to an insignificant part of their exposures. The smaller banks for which this change will be more relevant have not been included in this study.

3. Overview of results Table 1 and Table 2 show the overall effect of the capital charges introduced with the revisions to the market risk framework. The current capital charges have been calculated based on the capital requirements at 31 December 2008. However, the market risk capital requirements have been adjusted by replacing the VaR at the reporting date by the VaR of a more conventional market period such as 31 December 2006 if this was reported by the bank. This better reflects the long-term impact on market risk capital requirements.

The additional capital requirements have been calculated by adding the new capital requirements for stressed VaR, equity specific risk, the incremental risk capital charge and the capital requirements for securitisation exposures. The previous specific risk capital surcharge, the capital charge for securitisation exposures under the standardised measurement method and the impact (if positive) of including securitisation exposures in the VaR have been removed from the capital requirements. 4 If a particular bank did not report data on an aspect of the revisions, the change in capital requirements for this item in the calculation of the overall change in capital requirements was assumed to be zero. Therefore, the actual overall impact of the revisions may be underestimated.

The totals in Table 1 and Table 2 approximate the combined effect of all proposed revisions if only re-securitisation exposures were treated under the standardised measurement method. It is important to note that the results on the impact of new standardised capital charges on re-securitisations reported here represent a lower bound for the overall effect of the securitisation capital charges. 5 Finally, it should be noted that the results in Table 1 and Table 2 do not include the capital requirements for the correlation trading portfolio.

Table 1 shows the change in overall bank-level (ie including market, operational and credit risk) capital requirements which are due to the changes introduced with the revisions to the market risk framework. On average, overall capital requirements would increase by 11.5% The quantitative questionnaire used for this impact study did not differentiate between securitisations and resecuritisations when measuring the size of current specific risk capital charges for securitisation and resecuritisation exposures and the impact of securitisation and re-securitisation exposures on VaR. As a result, it was simply assumed that all measurements pertain to re-securitisation exposures which results in a clear overestimate of the size of current specific risk capital charges and the VaR impact of these exposures.

The total including re-securitisation exposures only represents a lower bound because (i) all specific risk capital charges under the old treatment have been removed; and (ii) some securitisation capital charges will continue to apply.

Analysis of the trading book quantitative impact study including re-securitisation exposures only. The largest contribution to the increase can be attributed to the incremental risk capital charge (6.2%), followed by re-securitisation exposures (5.4%), the stressed VaR (4.6%) and the changes in the specific risk capital charges for equity exposures under the standardised measurement method (0.2%). 6

–  –  –

The same results are reported in Table 2 as a percentage of banks’ market risk capital requirements. The largest contribution to the average increase can be attributed to the stressed VaR (110.8%), followed by the incremental risk capital charge (102.7%), resecuritisation exposures (92.7%) and the changes in the specific risk capital charges for equity exposures under the standardised measurement method (4.9%).

Unlike the results for individual banks, the averages for the individual changes do not add up to the average of the total change in capital requirements since the set of banks providing results for each capital charge differs.

–  –  –



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