Basel cuts credit spread charge from banking book work

Charge was felt to be "too difficult to capture" without complex rules

BIS headquarters, home of the Basel Committee

The Basel Committee on Banking Supervision has dropped plans for a standardised capital charge for credit spread risk on loans, bonds and other assets held in the banking book, according to two regulatory sources. The issue was felt to be adding too much complexity to the overhaul of much-delayed rules on interest rate risk in the banking book (IRRBB).

A first IRRBB consultation has been in the works since 2012, and is now expected in time for a June meeting of the Basel Committee, the sources say. It will contain proposals for both a standardised IRRBB capital charge and a framework that would give national supervisors some flexibility.

That is a sign of the difficulties regulators have already encountered. The decision to abandon the credit spread charge – designed to capture the risk of declining credit quality – is described as an attempt to make the work a little easier.

"It was excluded because it added to the complexity, and they wanted to have a rather simple framework. It was difficult to capture and if you wanted to capture it right, it was complex. And there were some questions about the materiality of it," says one regulatory source.

The move is likely to please banks. In comment letters to the IRRBB working group, industry groups had criticised the planned credit spread capital requirements for overlapping with existing credit charges. They also argued a fair-value approach to calculating the credit spread risk charge was not appropriate for banking books, as most components are accounted for at amortised cost.

It was difficult to capture and if you wanted to capture it right, it was complex

While credit spread risk in the banking book will no longer be addressed as part of the IRRBB consultation, the regulatory sources said the Basel Committee may revisit the issue in another context.

A spokesperson for the Basel Committee declined to comment.

Meanwhile, regulators are also looking to strengthen the proposed Pillar II treatment of IRRBB. Pillar II is a flexible framework that gives supervisors the power to apply extra charges where they see fit.

Risk reported in December that the IRRBB working group had started considering the more flexible Pillar II approach alongside its original plans for a Pillar I framework. According to the regulatory sources, the latest Pillar II proposals will require banks to hold more capital or reduce risks if a standardised shock reduces the economic value of equity by a certain percentage of common equity Tier I capital.

This is more rigid than the current Pillar II rules from Basel II, which give supervisors discretion to determine if a bank has insufficient capital to support its interest rate risks. Supervisors are only advised to pay particular attention to the capital sufficiency of "outlier banks" if a standardised interest rate shock leads to an economic value decline of more than 20% of the sum of Tier I and Tier II capital.

It's unclear where the percentage threshold will be set in the new proposals, or how the standardised shocks will be calibrated. One source said the shocks will likely go beyond parallel rate movements to include steepening and flattening scenarios.

The Pillar I proposal, meanwhile, will be a hybrid approach, allowing banks to use standardised calculations alongside some internally modelled figures for banking book components that require behavioural assumptions. This includes non-maturing deposits such as current accounts, for which customers can choose to withdraw their money at any point.

The IRRBB consultation paper was initially due at the end of 2014, with a corresponding quantitative impact study (QIS) to be launched in January.

Regulatory sources say the paper is now due to be published in time for the Basel Committee's meeting in June. The QIS is expected to follow soon after, and will be based on June data.

Only users who have a paid subscription or are part of a corporate subscription are able to print or copy content.

To access these options, along with all other subscription benefits, please contact or view our subscription options here:

You are currently unable to copy this content. Please contact to find out more.

You need to sign in to use this feature. If you don’t have a account, please register for a trial.

Sign in
You are currently on corporate access.

To use this feature you will need an individual account. If you have one already please sign in.

Sign in.

Alternatively you can request an individual account here