The so-called capital floor “will be based on revised standardised approaches for credit, market and operational risk, which are currently under consultation,” the Basel Committee on Banking Supervision said in a statement released this week.
The Basel Committee has been in the forefront of a global effort requiring banks to hold more capital after the 2008 financial crisis when many lenders needed government bailouts as they didn’t have enough funds in reserve.
However the increased capital ratios that are coming into effect under the so-called Basel III regulations are still mostly based on a bank’s internal model of calculating the risk of its activities.
“The floor is meant to mitigate model risk and measurement error stemming from internally-modelled approaches,” said the Basel Committee.
“It would enhance the comparability of capital outcomes across banks, and also ensure that the level of capital across the banking system does not fall below a certain level,” it added.
In a separate document also released this week, the Basel Committee also released proposals to reduce reliance on international credit ratings agencies in determining credit risk, in favour of a handful of risk measures that can be applied globally but which also reflect the local nature of some exposures.
Banks may comment on both proposals until March 27. -AFP