MUMBAI: The Reserve Bank has issued the final directions for minimum capital requirement of banks for their market risk, setting out banks capital requirements for trading, equity, interest-rates and foreign-exchange exposures, under the Basel III framework, which will into effect from April 2027.
The guidelines, first introduced in April 2023, proposed adoption of the simplified standardised approach for computing capital requirements for market risks under the revised Basel III framework.
The new framework covers three broad risk classes: interest-rate risks, equity risks and foreign-exchange risks.
Now, under the final directions issued Monday, the RBI has clarified the boundary between the banking book and trading book for a commercial bank, clarifying that the trading book, for capital adequacy, will include all instruments that are classified as held for trading (HFT).
The RBI also said a bank should not classify any instrument under the trading book as part of the banking book to showcase lower capital requirements. In case a bank classifies such instruments as baking book, the lender is supposed to determine its total capital requirement before and after the classification, and should maintain that difference.
A bank can hedge risk in the banking book either directly through an external hedge or through internal risk transfer, the RBI said.
The central bank has also prescribed that a simplified standardised approach for calculating market-risk for risk-weighted assets. The framework covers three broad risk classes: interest-rate risks, equity risks and foreign-exchange risks.
The regulator has also said banks will have to meet market-risk capital requirements continuously, at the close of each business day.
Further it said it has the option to exclude certain structural foreign currency investments from the calculation of net open position (NOP), on both a standalone and consolidated basis. A bank may opt to exclude structural forex positions from NOP on a case-to-case basis, provided it complies with certain criteria, which include that the exclusion is made for at least six months, among others.
Banks will also have to recalculate the eligible structural exemption on a quarterly basis, the regulator said, adding the new directions will come into effect from April 1, 2027.