RBI issues draft guidelines for minimum capital requirements for market risk, here is all you need to know

The Reserve Bank of India (RBI) has released draft guidelines for minimum capital requirements for market risk, as it aims to align banking regulations with Basel III standards. The central bank has invited feedback on the proposed norms until April 15, with the final guidelines expected to become effective from April 1, 2024.

The draft guidelines outline separate classifications for securities included in banks’ trading and banking books, which are subject to market risk and credit risk capital requirements, respectively. Banks will need to have well-defined policies, procedures, and documented practices to determine which instruments to include or exclude from the trading book when calculating regulatory capital.

According to the RBI, market risk refers to the potential losses arising from on and off-balance sheet positions due to changes in market prices. Interest rate and equity risk are subject to market risk capital requirements for trading book instruments, while foreign exchange risk (including gold and precious metals) are subject to both trading and banking book instruments.

The central bank has mandated that banks must include only those financial instruments on FX in the trading book that are not legally restricted from being sold or fully hedged, and fair value any trading book instrument on a daily basis. The RBI has also specified the instruments that banks need to include in the trading and banking book.

The proposed norms require banks to classify any instrument held for at least one year as a trading book instrument under the following categories: short-term resale, profiting from short-term price movements, locking in arbitrage profits, or hedging risks that arise from the previous three categories. In case a bank needs to deviate from the presumptive list, it will have to seek the prior approval of the central bank, and document any deviations.

Further, shifting instruments between the trading and banking books will be allowed only in exceptional circumstances, with the approval of the RBI and the bank’s board. Any capital benefit resulting from such shifting will not be allowed, the RBI stated.

FAQs:

Q: What are Basel III standards?

Basel III is a set of global regulatory standards that were developed by the Basel Committee on Banking Supervision in response to the 2008 financial crisis. These standards aim to improve the resilience of the banking sector by strengthening capital requirements, liquidity standards, and risk management practices. 

Q: Where is the headquarters of the Reserve Bank of India (RBI) located?

The Reserve Bank of India (RBI) headquarters are located in Mumbai.

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