European banks saw their risk weighted assets leap at the turn of the year, as new trading book rules collided with the European Banking Authority's call to achieve a 9% capital minimum.
Comparability is not the main complaint levelled at the rules by the industry. Banks do not dispute the fact that trading book capital needed to increase, but say the modular approach ends up double-counting risks, resulting in certain positions being unnecessarily penalised.
“Intellectually, Basel 2.5 does not work. Regulators have added three or four new elements to market risk capital that overlap to a huge degree. The same risks are being double- and triple-counted. It’s a bit of a shame that all these man hours have been expended to produce a new market risk capital number that may feel right, but is intellectually wrong,” says Adrian Docherty, head of financial institutions solutions at BNP Paribas in London.
There is hope in some quarters that the planned Basel Committee on Banking Supervision review of trading book capital rules will result in a more streamlined approach to capital. But the review has already been significantly postponed - it was originally due to be complete by the end of last year - and although a consultation paper is due in the next couple of months, sources close to the project warn there will be no concrete results soon.
This article was first published on Risk