* 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 (Reuters) - 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 accounting solvency.
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 committee said.
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.