RBI Tightens Market Risk Rules, Bars Book Reclassification To Lower Capital Requirements

New Delhi, Sep 22 (KNN) The Reserve Bank of India (RBI) has barred banks from reclassifying instruments between the trading book and banking book for regulatory arbitrage or to achieve lower capital requirements under its revised market risk framework.

The directions, issued to align India’s market risk rules with the revised Basel III framework, are aimed at simplifying regulations while providing banks with greater flexibility and ease of implementation. 

The framework will take effect from April 1, 2027, giving banks time to prepare.

Revised Market Risk Capital Framework

The directions apply to all commercial banks except small finance banks, payments banks and local area banks.

Under the new framework, banks will be required to use the Simplified Standardised Approach (SSA) to calculate risk-weighted assets for market risk. The risk-weighted assets will be calculated by multiplying the capital requirement determined under the framework by 12.5.

The RBI said banks cannot shift instruments between the trading and banking books with the intention of reducing their regulatory capital requirements.

Revised Treatment Of Interest Rate Risk

The central bank has also revised the specific risk tables for interest rate risk to align them with guidelines issued by the Basel Committee on Banking Supervision (BCBS). The revised treatment is intended to provide a more concise framework for assessing such risks.

For debt mutual funds and exchange-traded funds held in the trading book, the RBI has revised the capital treatment to base capital computation on the underlying risk drivers while retaining safeguards to manage associated risks.

The revised framework is expected to bring India’s market risk capital requirements closer to the Basel III framework while providing banks with a defined approach to capital computation.

(KNN Bureau)