The Reserve Bank of India (RBI) has released draft guidelines for minimum capital requirements for market risk, as it aims to align banking regulations with Basel III standards. The central bank has invited feedback on the proposed norms by April 15, with the final guidelines expected to come into effect from April 1, 2024.
The draft guidelines outline separate classifications for securities included in the trading and banking books of banks, which are subject to market risk and credit risk capital requirements, respectively. Banks will need to have well-defined policies, procedures and documented practices to determine which instruments to include or exclude from the trading book when calculating regulatory capital.
According to the Reserve Bank of India, market risk refers to the potential loss from on-balance sheet and off-balance sheet positions due to changes in market prices. Interest rate and equity risk are subject to market risk capital requirements for trading book instruments, while foreign exchange risk (including gold and precious metals) is subject to both trading and banking book instruments.
The central bank has mandated that banks should include in the trading book only those financial instruments on FX that are not legally prohibited from being sold or fully hedged, and that proper accounting of any trading book instrument on a daily basis is the value. RBI has also specified the instruments that banks need to include in the trading and banking book.
The proposed norms require banks to classify any instrument held for at least one year as a trading book instrument under the following categories: short-term resale, profiting from short-term price movements, locking in arbitrage profits, or hedging risk which are generated. last three categories. If a bank needs to deviate from the presumptive list, it will have to take prior approval of the central bank and document any deviation.
Further, transfer of instruments between the trading and banking books will be permitted only in exceptional circumstances, with the approval of the RBI and the bank’s board. RBI said that any capital gain arising from such transfer will not be allowed.
questions to ask,
Q: What are Basel III norms?
Basel III is a set of global regulatory standards developed by the Basel Committee on Banking Supervision in response to the 2008 financial crisis. These standards aim to improve the resilience of the banking sector by strengthening capital requirements, liquidity standards and risk management practices.
Question: Where is the headquarter of Reserve Bank of India (RBI) located?
The headquarters of the Reserve Bank of India (RBI) is located in Mumbai.