1996 Amendment to Include Market Risk

1996 Amendment to Include Market Risk

  • The 1996 Amendment to Include Market Risk was a revision to the Basel I capital accord that was published in January 1996.
  • The amendment was designed to address the risk of market volatility, which was not adequately covered by Basel I.
  • The amendment requires banks to hold capital against their market risk exposures, which are calculated using a standardized approach or an internal models approach.
  • The standardized approach uses a set of fixed risk weights to calculate market risk capital requirements.
  • The internal models approach allows banks to use their own models to calculate market risk capital requirements, subject to certain restrictions.

MCQs

  1. What was the purpose of the 1996 Amendment to Include Market Risk?
    • To address the risk of market volatility.
  2. What are market risk exposures?
    • The risk that the value of a bank’s assets or liabilities will decline due to changes in market prices.
  3. What are the two approaches to calculating market risk capital requirements under the 1996 Amendment?
    • The standardized approach and the internal models approach.
  4. What are the fixed risk weights used in the standardized approach?
    • The fixed risk weights range from 0% to 100%, depending on the type of asset.
  5. What are the restrictions on the use of the internal models approach?
    • Banks must have a sound risk management system in place and their models must be validated by an independent third party.

Answers

  1. To address the risk of market volatility.
  2. The risk that the value of a bank’s assets or liabilities will decline due to changes in market prices.
  3. The standardized approach and the internal models approach.
  4. The fixed risk weights range from 0% to 100%, depending on the type of asset.
  5. Banks must have a sound risk management system in place and their models must be validated by an independent third party.

Benefits of the 1996 Amendment

  • The 1996 Amendment has helped to improve the resilience of the banking system to market risk shocks.
  • It has also helped to reduce the risk of bank failures due to market volatility.
  • The amendment has also made the banking system more transparent, as banks are now required to disclose their market risk exposures.

Criticisms of the 1996 Amendment

  • The 1996 Amendment has been criticized for being too complex and for being difficult to implement.
  • It has also been criticized for not being comprehensive enough, as it does not cover all types of market risk.
  • The amendment has also been criticized for being too focused on the short-term, as it does not take into account the long-term risks associated with market volatility.

Overall, the 1996 Amendment to Include Market Risk was a significant step forward in the regulation of market risk in the banking industry. However, it is still a work in progress and there is room for improvement.