The Basel Committee on Banking Supervision recently published its second report on the regulatory consistency of risk-weighted assets for market risk in the trading book.
The study is a part of the wider Regulatory Consistency Assessment Program intended to ensure consistent implementation of the Basel III framework.
Tuesday's report follows up on an initial study conducted by the committee published in January and extends earlier analysis to more representative and complex trading positions.
The results show significant variation in the outputs of market risk internal models used to calculate regulatory capital. In addition, the results show that variability typically increases for more complex trading positions.
The analysis confirms that differences in modeling choices are the most significant drivers of variation in market risk RWAs across banks.
It also supports the type of policy recommendations that were identified in the earlier report to reduce the level of variability in market risk RWAs, including improving public disclosure and the collection of regulatory data to aid the understanding of market risk RWAs, narrowing the range of modeling choices for banks, and further harmonizing supervisory practices with regard to model approvals.
The Basel Committee issued a second consultative document in October on its fundamental review of the trading book, which includes a series of measures to narrow market risk RWA variability. The committee is also developing proposals to improve Pillar 3 disclosure requirements for banks.
"Today's report complements and reinforces the committee's earlier trading book report. It shows that as portfolios get more complex, the variability can increase. These findings, along with the results of the committee's banking book review, have been important inputs to our ongoing work to address RWA variations," Stefan Ingves, the chairman of the Basel Committee and the governor of Sveriges Riksbank, said.
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