RBI's Draft Guidelines on Minimum Capital Requirements for Market Risk
The Reserve Bank of India recently published draft guidelines for minimum capital requirements for market risk - under Basel III framework which proposes to impose a slew of curbs on a bank's trading and banking books and steeply increasing the penalties and provisioning ratios among other things. The new norms draw a boundary between the banking book and the trading book. It list out the instruments that can be included in the trading book, which are subject to market risk capital requirements. It also lists those to be included in the banking book which is subject to credit risk capital requirements. The capital requirement for both specific risk and general market risk will be 9 percent each of the core capital of the bank and the exposure to the specified instruments.
Further, Since a financial liability is a contractual obligation to deliver cash or another financial asset, banks shall only include a financial instrument or forex instruments in the trading book when there is no legal impediment against selling or fully hedging it. The new guidelines assign unlisted equities and equity investments in subsidiaries/ associates; instruments designated for securitisation warehousing; securities with real estate as underlying as well as derivatives thereof; securities with retail and micro, MSME exposure as underlying; equity investments in funds to the banking book and ban short positions on any instrument except in derivatives and Central government securities. Banks are allowed to engage in the underwriting of issues of shares, debentures and bonds.
