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UPDATE 1-Banking regulators propose tougher rules on trading books

Huw Jones
Thursday, 31 Oct 2013 | 9:02 AM ET

* Basel proposes standardised risk approach for all banks

* Basel to study impact of a capital "floor"

* Standardised and internal risk models to be more rigorous

(Adds more detail, background)

LONDON, Oct 31 (Reuters) - Banks using in-house mathematical models to value their trading book risks should also use a standardised approach as a backstop, global banking industry regulators said on Thursday.

The Basel Committee of banking supervisors from nearly 30 countries have published a second, more detailed 127-page consultation on reforming how risks on trading books are calculated after finding wide discrepancies among banks.

In reviewing the causes of the financial crisis regulators have accused banks of having underestimated the risk levels for their trading books, which are meant to house tradeable, market-related assets and are valued differently from the banking book containing a bank's other assets, which are not actively traded.

Policymakers in Britain and the United States have said that Basel's current system of allowing the use of in-house models to assign weightings to risky assets to determine capital levels is too complicated and easily gamed.

Faced with such pressure, the committee has proposed a backstop for the biggest banks.

"This is achieved by establishing a closer calibration of the two approaches, requiring mandatory calculation of the standardised approach by all banks, and requiring mandatory public disclosure of standardised capital charges by all banks, on a desk-by-desk basis," the committee said in a statement.

The standardised approach refers to measuring credit risks on assets by using credit ratings from agencies such as Moody's and Standard & Poor's. Bespoke models use a bank's own estimates of risks, subject to regulatory vetting.

The standardised approach itself would be revised so that it is "sufficiently risk-sensitive to act as a credible fall-back to internal models".

Bespoke or internal models would also undergo a more rigorous vetting process by regulators, the committee said.

It is also considering the merits of introducing the standardised approach as a floor or surcharge to the models-based approach.

"However, it will only make a final decision on this issue following a comprehensive quantitative impact study, after assessing the impact and interactions of the revised standardised and models-based approaches," the committee said.

The committee introduced a quick fix in 2009, known as Basel 2.5, following the 2007-09 financial crisis which revealed banks to be under capitalised, but felt more needed to be done.

The latest paper also sets out how to make the boundary between a bank's trading book and its core banking book "less permeable" to reduce the incentives for regulatory arbitrage.

It is alleged that prior to the crisis banks had been shifting assets that might have been kept on the banking book to trading books and as a result had reduced the capital requirement, due to the difference in how the assets were valued.

(Editing by Greg Mahlich)