Basel III’s approach to market risk sets many banks’ and credit unions’ reserve requirements for available-for-sale securities and derivatives positions under risk-based capital rules.
The simplified approach to market risk will help limit regulatory burdens by retaining the existing Basel II standardized approach to market risk with the addition of a “scaling factor” add-on that the Committee reduced from its original proposal at World Council’s urging. World Council argued that the Basel Committee should retain the Basel II approach to market risk with limited modifications in comments made in June 2018. Credit unions and banks will be able to utilize the simplified approach unless the institution is one of the world’s 29 largest banks, uses internal models or trades in some types of options.
The final version of the standard retains the Basel II approach to market risk with a 30 percent add-on for interest rate derivatives, which is significantly less than the 50 to 100 percent add-on originally proposed by the Committee.
“We are very pleased that the Basel Committee has finalized a proportional regulatory approach to market risk reserves that will help limit compliance burdens on credit unions and other community-based depository institutions. We also strongly support the Committee’s decision to significantly reduce the amount of additional reserves community-based institutions will be required to hold against interest rate swaps and caps under the simplified approach, compared to its proposal,” said Michael Edwards, World Council’s senior vice president and general counsel.
The revised standard will take effect Jan. 1, 2022.