What changed
RBI has amended the Basel III Capital Regulations and Local Area Bank capital adequacy norms to align with the September 2023 Master Direction on Investment Portfolios. The trading book is now clearly defined under the Held for Trading (HFT) classification, and the AFS-reserve is included in regulatory capital. Market risk capital requirements have been recalibrated with intermediate scalers, though the full Simplified Standardised Approach will be implemented later.
What it means for you
Banks must update their internal capital planning and risk models to reflect the new trading book definition and AFS-reserve treatment. The intermediate scalers for market risk capital will affect capital ratios, so banks should review their strategies. This is a preparatory step before the full Simplified Standardised Approach for market risk is rolled out.
What you must do
- Review and update your bank's trading book classification to align with the HFT definition in the new Investment Master Direction.
- Incorporate AFS-reserve into regulatory capital calculations as per the amended guidelines.
- Recalibrate market risk capital requirements using the intermediate scalers provided in the annexes.
- Adjust capital planning and strategy to account for the transitional scalers ahead of the full Simplified Standardised Approach.
Who it affects
All Commercial Banks (excluding Regional Rural Banks), Local Area Banks, Risk management and treasury teams, Capital planning and compliance departments
When do these new trading book rules take effect?
The instructions are applicable from April 1, 2024, for all commercial banks except Regional Rural Banks.
What is the AFS-reserve and how does it affect capital?
The AFS-reserve is a new component introduced under the Investment Master Direction that is now part of regulatory capital. Banks must include it in their capital adequacy calculations.
Will the Simplified Standardised Approach for market risk be implemented immediately?
No, the final guidelines on the Simplified Standardised Approach will be issued later. For now, banks must use intermediate scalers for market risk capital requirements.