What changed
Earlier, UCBs used an interim approach with a flat 2.5% additional risk weight on almost the entire investment portfolio, 100% risk weight on forex/gold open positions, and required Investment Fluctuation Reserve of 5% on HFT and AFS investments. Now, UCBs with AD Category I licence must compute capital charge for market risk using duration-based method for interest rate risk in trading book, equity risk, and forex/gold risk, aligning with Basel Committee amendments.
What it means for you
UCBs with AD Category I licence need to upgrade their risk measurement systems to calculate duration-based capital charges for market risks, moving from a simple risk-weight approach. This increases capital requirements for banks with larger trading books or forex exposures, impacting profitability and capital planning. Banks must ensure continuous compliance, not just at reporting dates.
What you must do
- Identify all positions in Held for Trading and Available for Sale categories, open forex/gold limits, and derivatives for trading book.
- Implement duration-based measurement for interest rate risk in trading book as per Section B of guidelines.
- Compute capital charge for equity positions in trading book (partially applicable) and forex/gold open positions.
- Aggregate capital charges across all market risk types and maintain minimum capital adequacy on a continuous basis.
- Restrict investments to only permitted categories as per extant RBI instructions.
Who it affects
Primary (Urban) Cooperative Banks with AD Category I licence, Treasury and risk management departments of UCBs
Which UCBs are covered by this circular?
Only UCBs holding AD Category I licence (authorised to deal in foreign exchange) are required to provide capital for market risk from April 1, 2010. The guidelines target systemically important and large-sized UCBs comparable to medium commercial banks.
What is the key change from the earlier interim approach?
Earlier, UCBs used a flat 2.5% additional risk weight on investments and 100% on forex/gold open positions. Now, they must use a duration-based capital charge for interest rate risk in the trading book, which is more risk-sensitive and aligns with Basel standards.
Does this apply to the entire bank or only the trading book?
The capital charge covers interest rate and equity risks in the trading book, and foreign exchange risk (including gold) across both banking and trading books. The trading book includes Held for Trading and Available for Sale securities, open forex/gold positions, and derivatives.