U.S. bank regulators have finalized their version of the “Basel II.5” rules governing regulatory capital for the trading book related to market risk (now measured also to address certain “specific” credit and liquidity risks resulting from trading operations). The U.S. rules differ markedly from the global ones, largely due to the Dodd-Frank requirement that U.S. capital regulations eliminate reliance on credit ratings. The U.S. standards are thus not only at least as stringent as the global revisions (which require roughly a tripling of regulatory capital), but are also often more stringent (especially with regard to sovereign and securitization exposures). The U.S. does, however, largely continue the global reliance on value-at-risk (VaR), even though it has joined the Basel Committee in proposing a “fundamental rewrite” of the entire market-risk regime that would, among other things, eliminate VaR. The final rules also largely track the Basel II.5 standards with regard to how banks are to determine whether assets fall under these trading-book standards or must be capitalized in compliance with the banking-book rules. This is also subject to a sweeping rewrite under the “fundamental” proposal due to fears about continued opportunities for regulatory arbitrage under the II.5 requirements.
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