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BANKING

The scramble for capital: Trading-book risk - Tougher trading

The scramble for capitalMore questions than answers

An uneven playing field

Regulators are tightening bank capital rules for trading-book risk. In July, both the Basle Committee and the EU, through its Capital Directives Requirement, published new proposals aimed at curbing excessive risk-taking.

Taken together, the measures include an incremental risk charge (IRC) for certain trading-book risks, the introduction of a stressed value at risk (VaR) model, and new rules on re-securitizations.

All three measures will result in higher capital charges, with banks possibly having to triple the amount of capital that they must hold against their trading-book assets, according to some estimates.

"Between these three new regulations, it is not hard to see how market-risk RWAs [risk-weighted assets] could increase sharply, leaving wholesale banks with substantially higher overall capital requirements and significantly lower equity tier 1 ratios," says a report on the changes published by Credit Suisse last month.

The report adds that the new regulations are targeting banks that use the internal-ratings based approach, which proved so fallible during the crisis. Under the new rules banks would have to estimate potential losses over much longer periods of possible stress and from events such as credit ratings downgrades.

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