* Regulators want better risk measurement
* Boundary between trading and banking books to change
* Reform to come into effect from 2015 at earliest
By Huw Jones
LONDON, May 3 Global regulators on Thursday
mapped out the next stage in their plans to strengthen banks,
proposing new ways to calculate trading risks to keep lenders
stable in stormy markets.
People familiar with the Basel Committee on Banking
Supervision's plans said it was too early to say if the changes
would significantly increase how much capital banks must hold.
Since January, the committee has forced banks to hold far
more capital against risky instruments like securitised and
structured products held on trading books.
Those rule changes were seen as a stopgap solution to
quickly correct undercapitalised trading books which left many
banks having to be rescued by taxpayers in the financial crisis.
The new move proposes a fundamental reform of how banks
cover trading risks and sets out several changes whose impact
the committee has yet to quantify.
The planned changes only target trading books and are
separate from an already globally agreed Basel III accord that
will force banks to hold more core capital buffers from 2013 and
which sparked splits among European Union finance ministers on
Wednesday and Thursday.
Under Basel's trading book plans, the boundary between a
bank's trading and banking books would change, along with the
model banks use to measure risks and determine how much capital
they must hold.
The plans are out for public consultation until September
and the committee will come up with concrete proposals next year
for further industry feedback. The changes are unlikely to be
implemented before 2015 at the earliest.
The inclusion of an instrument in a trading book could
depend on whether it can actually be traded, and would be valued
daily in line with market changes and reflected in quarterly
earnings, the committee proposed.
An alternative boundary being looked at is basing capital
requirements on risks that threaten a bank's regulatory and
The regulators also proposes making banks switch to a
different model for measuring risks which in turn determine how
much capital must be set aside.
The most common method currently is known as Value at Risk
(VaR) and comes up with a percentage figure, usually between 1
and 10, for the probability that a portfolio will have a loss of
more than a certain figure over a period of time.
The Basel Committee proposes requiring banks to switch to
the "expected shortfall" model.
This combines aspects of VaR with a consideration of what
would be the loss if things turned out bad for a portfolio. It
also includes "tail risk" or losses from low probability events.
"The Committee recognises that moving to expected shortfall
could entail certain operational challenges; nonetheless it
believes that these are outweighed by the benefits of replacing
VaR with a measure that better captures tail risk," the
Under Basel 2.5 banks already have to use a "stressed"
variant of VaR which requires banks to hold bigger capital
buffers. A shift to expected shortfall may not necessarily
trigger demand for large amounts of additional capital.