Portfolio management trading essentials technical analysis risk. Metro bank said hundreds of millions of pounds of loans needed to be categorised as risk weighted assets. Basel capital rules for banks trading books will shift business. The revised approach to the regulation of banks trading books. Regulatory capital requirements for european banks latham. Calculating the capitaltorisk weighted assets ratio for.
See basel committee on banking supervision, regulatory consistency assessment programme rcap analysis of risk weighted assets for market risk. The allocation of assets into the trading book has a significant impact on a firms regulatory risk capital requirements. The mrr rule requires banks to adjust their capital requirements based on the market risks of their trading positions. This report is the second by the basel committee to analyse variation in risk weighted assets rwa in banks using internal ratingsbased models to calculate credit risk capital requirements. Trading book vs banking book banks are required to divide their balance sheets between banking and trading books both from regulatory and accounting perspective. The rule applies to banks worldwide with total trading activity. Metro bank shares crash after loans blunder revealed. A trading book is defined as positions which the bank holds for the purpose of short term gain and which it can close when markets conditions are favourable. The basel committee on banking supervision has today published its second report on the regulatory consistency of riskweighted assets rwas for market risk in the trading book. Before a bank can calculate rwa for credit risk and rwa for market risk, it must follow the requirements of rbc25 to identify the instruments that are in the trading book.
Riskweighted assets are used to determine the minimum amount of capital that must be held by a bank, by assigning risk levels to each type of asset. Such differences could be justified, provided that they are driven by differences in actual risk taking and business models. Riskbased capital requirements and optimal liquidation. Calculate the capitaltorisk weighted assets ratio for a. The capitalto risk weighted assets ratio for a bank is usually expressed as a percentage. First, it considers those risk estimates used for exposures to retail customers and small and mediumsized enterprises. Risk weighted assets are downright confusing, but every bank investor needs to understand them. If the management creates a diverse portfolio of assets, the institution can. Banks are strictly prohibited from reallocating an instrument in the trading book into the banking book for regulatory arbitrage benefits. Rbc20 calculation of minimum riskbased capital requirements.
The focus on credit risk is important, as it constitutes the largest component of riskweighted assets rwas, and a dominant source of overall variations in rwa at the bank level, accounting for 77% of the observed dispersion. The current minimum requirement of the capitalto risk weighted assets ratio, under basel iii, is 10. Second report on the regulatory consistency of risk. The new basel iii accord will have a significant impact on the banks core. What are riskweighted assets, and why do they matter to bank investors.