By Huw Jones
LONDON (Reuters) - Global regulators plan to revise rules determining the minimum amount of capital banks must set aside to cover risk from trading stocks, bonds, derivatives and currencies.
The alterations are expected to make it easier for banks to apply the rules when they come into effect in January 2022, the Basel Committee, made up of banking regulators from the world's main financial centers, said on Thursday.
The changes are expected to slightly lower the capital hit on banks. Market risks account for a small percentage of a bank's total capital buffer, though it can be far higher for some of the world's biggest trading banks.
The rules from 2016, known as the Fundamental Review of the Trading Book, form part of the Basel III accord agreed by the Group of 20 Economies in the aftermath of the 2007-09 financial crisis that left taxpayers bailing out banks which were found to be dramatically undercapitalised.
"The requirements as they stood would have had a negative impact on banks' trading book activities, and their ability to provide financing and hedging solutions to end users," Mark Gheerbrant, head of risk and capital at global derivatives industry body ISDA, said.
A key revision is to the "Profit and Loss Attribution" test that determines whether a bank can use its own internal model to tot up trading risks and determine how much capital to hold.
If it fails, it would have to use the typically more conservative "standard" calculation set out by regulators.
ISDA said the proposal to add an amber warning to the pass or fail in the original rules should smooth a trading desk’s transition to the standard approach if it fails the test, avoiding a "cliff effect" or sudden increase in capital requirements.