Key facts
- US banks' proposed revisions to trading risk capital calculations may have a design flaw.
- This flaw could potentially offer uncapped capital relief.
- The issue stems from an effort to recognize risk diversification between the IMA and standardized approach.
- Meeting the conditions for negative risk-weighted assets would be challenging for banks.
Proposed revisions to how US banks calculate capital requirements for their trading risks contain a "design flaw" that could potentially offer uncapped capital relief, according to four quantitative modelling sources. The issue arises from an effort to recognize risk diversification between the Internal Models Approach (IMA) and the standardized approach, which may have gone too far. While banks would find it difficult to meet the conditions necessary to achieve negative risk-weighted assets (RWAs) for trading risk, some sources suggest regulators will still face challenges.