By Patricia Jackson and William Perraudin of the Bank’s Regulatory Policy Division and David Maude of the Bank’s Monetary Assessment and Strategy Division.
In the past three years, a revision to the Basle Accord and new EU Directives have radically changed the method for calculating capital to back the trading books of banks. The 1988 Basle Accord applied a credit-risk capital treatment to both the banking and trading books of banks—in other words, not only to loans, but also to readily tradable items such as securities. This credit-risk approach had a number of drawbacks when applied to trading books, and in 1988 work was started by both the Basle Committee on Banking Supervision and the European Union to find an alternative approach.
Testing value-at-risk approaches to capital adequacy