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2.6.3 The de Minimis Rule The Basel Committee has ruled out the use of simplifying approaches, allowing small institutions with negligible exposures to be excluded from the capital requirement for market risks:
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For the time being, the Committee does not believe that it is necessary to allow any de minimis exemptions from the capital requirements for market risk, except for those for foreign exchange risk set out in paragraph 13 of A.3, because the Capital Accord applies only to internationally active banks, and then essentially on a consolidated basis; all of these are likely to be involved in trading to some extent.83
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However, several countries, such as Germany and Switzerland, have included de minimis rules in their national regulations, especially with regard to asset management oriented institutions which have negligible market risk positions.84 Assuming the approval of the national authorities (subject to compliance with the criteria for de minimis exception), local supervisors are free to monitor the relevant exposures in the non de minimis institutions more carefully. The approach is reasonable for smaller asset management and private banking institutions, which do not take substantial amounts of risk on their own books, as they execute on behalf of their clients. The important distinction is between organizations subject to the standard model approach and those subject to the internal model approach, as this difference determines how risk has to be supported by capital. Thus it fixes capital that could be used for other business purposes.85
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2.7 THE STANDARDIZED MEASUREMENT METHOD
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With the standard approach, a standardized framework for a quantitative measurement of market risks and the capital calculation to support market risks is given for all banks. The capital adequacy requirements are preset, depending on the risk factor categories:
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Interest-rate and equity-price risks in the trading book Currency, precious metals, and commodity risks in the entire organization
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The capital adequacy requirements are calculated for each individual position and then added to the total capital requirement for the institution; see Table 2-2. For interest-rate risk, the regulations define a set of maturity bands, within which net positions are identified across all on- and off-balancesheet items. A duration weight is then assigned to each of the 13 bands, varying from 0.20 percent for positions under 3 months to 12.50 percent
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T A B L E 2-2
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Capital Adequacy Requirements with the Standardized Measurement Method
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Instrument Interest-rate-sensitive position
Risk Decomposition General market risk: duration or maturity method Specific market risk: net position by issuer weight factor, depending on the instrument class
Equity instruments
General market risk: 8% of the net position per national market Specific market risk: 8% of the net position per issuer
Precious metals Currencies Commodities
10% of the net position 10% of all net long positions or all net short positions, whichever is greater 20% of the net position per commodity group + 3% of the brutto position of all commodity groups
for positions over 20 years. The sum of all weighted net positions then yields an overall interest-rate-risk indicator. Note that the netting of positions within a band (horizontal) and aggregation across bands (vertical) essentially assumes perfect correlation across debt instruments. For currency and equity risk, the market risk capital charge is essentially 8 percent of the net position; for commodities, the charge is 15 percent. All of these capital charges apply to the trading books of commercial banks, except for currency risks, which apply to both trading and banking books. The framework for measurement of market risks and the capital calculation to support market risks has to ensure that banks and securities dealers have adequate capital to cover potential changes in value (losses) caused by changes in the market price. Not including derivatives, which usually exhibit nonlinear price behavior, the potential loss based on the linear relationship between the risk factors and the financial instruments corresponds to the product of position amount, sensitivity of the position value regarding the relevant risk factors, and potential changes in the relevant risk factors. Equation (2.9) provides a methodological basis for the measurement of market risks as well as the calculation of the capital requirements based on the standard approach.
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