RBI/2004/263
DBOD.No.BP.BC. 103
/ 21.04.151/ 2003-04 June 24, 2004 The
Chief Executives of
All Scheduled Commercial Banks
(excluding RRBs) Dear
Sir, Guidelines on Capital Charge
for Market risks The Basel Committee
on Banking Supervision (BCBS) had issued the ‘Amendment to the Capital Accord
to incorporate market risks’ containing comprehensive guidelines to provide explicit
capital charge for market risks. In India, as an initial step towards prescribing
capital charge for market risks, banks were advised to: - assign
an additional risk weight of 2.5 per cent on the entire investment portfolio;
- assign a risk weight of 100 per cent on the open position
limits on foreign exchange and gold; and
- build up Investment Fluctuation Reserve up to a minimum
of five per cent of the investments held in Held for Trading and Available for
Sale categories in the investment portfolio.
2. In
the Statement on Monetary and Credit Policy for the year 2002-03 announced in
April 2002, it was mentioned that it would be appropriate for banks to adopt the
BCBS norm on capital charge for market risk. Banks were also advised to study
the BCBS framework on capital for market risks and prepare themselves to follow
the international practices in this regard. As a further step in this direction,
Reserve Bank had issued draft guidelines on computing capital charge for market
risks, on the lines of the Basel Committee framework, in May 2003, to select banks
seeking their comments. 3. It has now been decided to assign explicit capital charge
for market risks on the lines of the Basel Committee guidelines. The draft guidelines
have been reviewed on the basis of the feedback received and the detailed guidelines
in this regard are furnished in the Annex.
As announced by the Governor on May 18, 2004 in paragraph 119
of the annual policy Statement for 2004-05, banks should maintain capital charge
for market risks in a phased manner over a two year period, as detailed below:
- Capital
for market risks on securities included in the Held for Trading category, open
gold position limit, open foreign exchange position limit, trading positions in
derivatives and derivatives entered into for hedging trading book exposures by
March 31, 2005, and
- In
addition to (a) above, capital for market risks on securities included in the
Available for Sale category by March 31, 2006.
4.
With a view to ensure smooth implementation of the guidelines, banks may nominate
suitable official(s) who would be the contact point in the bank. The following
details of the nominated official(s) may be advised to us viz. name, designation,
telephone number, fax number and postal address. These contact officials
may also seek clarifications, if any from Reserve Bank
Yours
faithfully,
(C.R.Muralidharan)
Chief General Manager-in-Charge Encls:
as above.
Extract
of Annual Policy Statement for the year 2004-05
" Capital Charge for Market Risk 119. In the
annual policy Statement of April 2002, banks were advised to adopt the Basel norm
for capital charge for market risk. As a further step in this direction, RBI issued
draft guidelines on computing capital charge for market risk to select banks seeking
their comments. In this context, with a view to ensuring smooth transition to
Basel II norms, it is proposed to phase the implementation of capital charge for
market risk over a two year period as under: - Banks
would be required to maintain capital charge for market risk in respect of their
trading book exposures (including derivatives) by March 31, 2005.
- Banks
would be required to maintain capital charge for market risk in respect of the
securities included under available for sale (AFS) category by March 31, 2006.
"
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