The Basel Committee has proposed a complete overhaul of the way regulatory capital is assigned to trading exposures held by banking organizations, the first ground-breaking rewrite of these rules since they were introduced in the mid-1990s. The rewrite does not reverse the direction set in Basel II.5 in 2009, and indeed would increase the already-tripled trading-book capital mandated in those Basel standards. As a result, banks active in capital-markets activities would see a dramatic increase in regulatory capital if the “fundamental” changes are adopted. As one objective of the revisions is to ensure that banks hold comparable capital regardless of where assets are held, even banks without major trading operations could see significant increases if banking-book assets are deemed “trading” ones subject to higher market-risk capital standards not echoed in the banking-book rules. Although many major issues have yet to be resolved before a new market-risk rule is finalized, the direction of these requirements will put pressure on banking organizations to return their operations to more traditional lines even where standards like the U.S. Volcker Rule3 do not apply.

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