Large Bank Examination Workshop February 2026

Market Risk

• Capital charge for specific risk (credit risk) in market risk framework (trading book) was lower than capital charge for credit risk in banking book • Lower capital charge for trading book led to incentives to conduct capital arbitrage  Banks hold assets in the investment portfolio using less capital than if the same assets with the same risk characteristics were held in the loan book.  This happened a lot!

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Basel II Framework

• Scope of application • Pillar I (minimum capital requirements)  Definition  Business line mapping  Classification of loss event types  Measurement approaches (3)  Qualifying criteria • Pillar II (supervisory review) • Pillar III (market disclosure/discipline)

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