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Overview of the Amendment to the Capital Accord to Incorporate Market Risks
V. Other issues relating to the operation of capital requirements for market risks
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28. Banks using their internal models will be required to have an integrated risk measurement system that captures all their market risks. This means in principle that, for a given risk factor category, the risk must be measured using a single approach (i.e., using either internal models or the standardised approach) for that risk category. Those progressing towards comprehensive models will be permitted on a transitional basis to use a mixture of models and the standardised measurement method for each separate risk factor category (exchange rates, interest rates, equity prices and commodity prices, including related options volatilities in each risk factor category). However, the use of such partial models will be subject to supervisory approval and the Committee plans to review this treatment in due course. Having adopted an internal model for one or more risk factor categories, a bank will not be permitted, save in exceptional circumstances, to revert to the standardised approach. All elements of market risk that are not captured by an internal model will remain subject to the standardised measurement framework. 29. While favouring capital requirements over position limits as the appropriate instrument for international convergence in the treatment of market risk, the Committee continues to believe that limits can have an appropriate place in national supervisory arrangements. Individual national supervisors will therefore maintain limits where they judge it appropriate to do so, both as a means of imposing absolute ceilings on banks' exposures and of reinforcing internal controls. For example, supervisors who use limits to restrain position-taking in foreign exchange markets would be free to continue to use limits in conjunction with the proposed capital requirements on open positions, whether that is done through models or the standardised measurement system. 30. Whether banks use models or not, it is important to note that capital requirements for counterparty credit risk with respect to derivative products will continue to apply under the terms of the 1988 Capital Accord, as modified by subsequent amendments. Additionally, in the same way as for credit risk, the capital requirements for market risk are to apply on a worldwide consolidated basis
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Overview of the Amendment to the Capital Accord to Incorporate Market Risks
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