RBI unveils draft norms for capital requirements – ET Auto

Banks have time until April 15 to respond to these guidelines.

The Reserve Bank of India (RBI) Friday published draft guidelines that seek to bring in capital thresholds for all tradable market instruments on the books of a bank to capture their real-time values.

Banks are now required to categorise instruments such as short-term resale, profits made from short-term price movements and hedging risks in their trading books, which will now have specified capital requirements for each instrument category.

The draft guidelines seek to bring in minimum capital requirements for market instruments in order to price in the risk of losses arising from movements in market rates. Banks have time until April 15 to respond to these guidelines.

“Banks shall only include a financial instrument or instruments on FX in the trading book when there is no legal impediment against selling or fully hedging it,” the RBI paper says. “Banks shall fair value daily any trading book instrument.”

According to the Bank of international settlements, many banks have portfolios of traded instruments for short-term profits. These portfolios referred to as trading books are exposed to market risk, or the risk of losses resulting from changes in the prices of instruments such as bonds, shares and currencies. Banks are required to maintain a minimum amount of capital to account for this risk.

The central bank separately set out rules for financial instruments to be included in the banking book, instruments that are subject to credit risk capital requirements. Banks have to measure and disclose the interest rate risk in the banking book keeping in mind the difference in economic value of equity and net interest income while baking in a set of prescribed interest rate shock scenarios.

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