Market Risk Capital Rules for Urban Co-op Banks (2010)

RBI/2009-10/309 UBD.BPD.(PCB).Cir.No. 42 /09.11.600/2009-10 February 8, 2010 The Chief Executive Officers of Primary (Urban) Cooperative Banks having AD Category I licence Dear Sir / Madam Prudential Guidelines on Capital Charge for Market Risks As you are aware, the Basel Committee on Banking Supervision (BCBS) had issued an amendment to the Capital Accord in 1996 to incorporate market risks.  As an initial step towards prescribing capital requirement for market risks, Urban Cooperative Banks (UCBs) were advised to assign an additional risk weight of 2.5% on almost the entire investment portfolio.  These additional risk weights are clubbed wtih the risk weights prescribed for credit risk in respect of investment portfolio of UCBs.  Further, UCBs were advised to assign a risk weight of 100% on the open position limits on foreign exchange and gold and to build up Investment Fluctuation Reserve up to a minimum of 5% of the investments held in Held for Trading and Available for Sale categories in the investment portfolio.  2.  The interim measures adopted by UCBs represent a broad brush and simplistic approach.  However, over a period of time, banks’ ability to identify and measure market risk has improved.  The Advisory Panel on Financial Regulation and Supervision to the Committee on Financial Sector Assessment (Chairman: Dr Rakesh Mohan and Co-Chairman: Shri Ashok Chawla) which looked into the present regulatory and supervisory framework for UCBs, had recommended assigning duration based capital charge for market risk for Scheduled UCBs that are systemically important and comparable in size to medium-sized commercial banks. Accordingly, it was proposed in the Annual Policy Statement for the year 2009-10 to prescribe capital charge for market risk in respect of systemically important and large sized UCBs with effect from April 1, 2010. In this backdrop, it has been decided that UCBs having AD category I licence would provide capital for market risk with effect from April 1, 2010.  The guidelines on capital charge for market risk are enclosed. UCBs are advised to restrict their exposure only to the permitted category of investments / instruments as per the extant instructions and provide capital charge for market risk as per the guidelines. Yours faithfully (A.K. Khound) Chief General Manager-In-Charge Encl: As above Guidelines on capital charge for Market Risks Introduction 1.   Market risk is defined as the risk of losses in on-balance sheet and off  balance sheet positions arising out of movements in market prices. The market risk positions subject to capital charge requirement are as under: (i) The risks pertaining to interest rate related instruments and equities in the trading book; and (ii) Foreign exchange risk (including open position in precious metals) throughout the bank (both banking and trading books). 2.  The guidelines in this regard are organized under the following five sections: Section

Reproduced for reference with acknowledgment — Source: Reserve Bank of India · RBI/2009-10/309 · issued 08 Feb 2010. The plain-English explanation above is BankPulse’s own independent summary.

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