Introduction: The Reserve Bank of India (RBI) has issued a crucial circular, RBI/2023-24/128, dated February 28, 2024, addressing Capital Adequacy Guidelines with a specific focus on the review of the trading book. This development aligns with the ongoing regulatory framework and introduces amendments in line with the Master Direction on Investment.
Detailed Analysis:
1. Background: Referencing the Master Circular – Basel III Capital Regulations and Master Direction on Capital Adequacy, the circular highlights the need for alignment with the Master Direction on the Classification, Valuation, and Operation of the Investment Portfolio.
2. Trading Book Amendments: The circular introduces amendments to the capital adequacy guidelines, reflecting changes in the Classification, Valuation, and Operation of the Investment Portfolio. Specifically, the ‘Held for Trading (HFT)’ accounting sub-classification and the introduction of AFS-reserve are emphasized.
3. Impact on Regulatory Capital: The circular underscores that AFS-reserve will now be considered a part of regulatory capital, impacting how banks assess their capital adequacy.
4. Market Risk Capital Requirements: The circular references the ‘Draft Guidelines on Minimum Capital Requirements for Market Risk – under Basel III,’ highlighting the revised definition of the trading book. It mentions the upcoming implementation of ‘Market Risk Capital Requirements – Simplified Standardised Approach,’ with detailed guidelines to be issued separately.
5. Recalibration of Market Risk Capital Requirements: In anticipation of transitioning to the ‘Simplified Standardised Approach,’ the circular announces the recalibration of existing market risk capital requirements. Intermediate scalers are introduced, urging banks to consider these changes in their strategies and capital planning.
6. Modification for Local Area Banks: The circular extends its impact on local area banks, with modifications outlined in Annex 2 of the Prudential Norms on Capital Adequacy.
Conclusion: Effective from April 1, 2024, these directives from the RBI carry significant implications for commercial banks (excluding Regional Rural Banks). Banks are urged to meticulously review and align their strategies, considering the recalibrated market risk capital requirements and impending changes in the trading book definition.
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Reserve Bank of India
RBI/2023-24/128
DOR.MRG.REC.80/00-00-003/2022-23
February 28, 2024
All Commercial Banks
(excluding Regional Rural Banks)
Dear Sir / Madam,
Capital Adequacy Guidelines – Review of Trading Book
Please refer to Master Circular – Basel III Capital Regulations dated May 12, 2023, and Master Direction – Prudential Norms on Capital Adequacy for Local Area Banks (Directions), 2021 dated October 26, 2021 (hereinafter together referred to as ‘capital adequacy guidelines’).
2. As you are aware, the Master Direction – Classification, Valuation and Operation of Investment Portfolio of Commercial Banks (Directions), 2023 dated September 12, 2023(hereinafter referred as ‘MD on Investment’) inter alia provides a clearly identifiable trading book under ‘Held for Trading (HFT)’ accounting sub-classification and introduces AFS-reserve which would be part of regulatory capital. In view of the changes cited above, it has been decided to amend the capital adequacy guidelines in alignment with the MD on Investment.
3. Accordingly, the provisions of Master Circular – Basel III Capital Regulations have been modified as provided in Annex 1.
4. It may be noted that ‘Draft Guidelines on Minimum Capital Requirements for Market Risk – under Basel III’ providing inter alia ‘Definition of trading book’ and ‘Market Risk capital Requirements – Simplified Standardised Approach’ were released on February 17, 2023 for public comments. While the revised definition of trading book for the purpose of capital adequacy will be as provided in Annex I of MD on Investment, the final guidelines on ‘Market Risk Capital Requirements – Simplified Standardised Approach’ will be implemented at a later date and detailed guidelines will be issued separately.
5. Considering the transition to ‘Market Risk Capital Requirements – Simplified Standardised Approach’, the extant market risk capital requirements have also been recalibrated by introducing intermediate scalers. Banks should keep this in view while reviewing their strategies and capital planning measures.
6. Further, the provisions of Master Direction – Prudential Norms on Capital Adequacy for Local Area Banks (Directions), 2021have been modified as provided in Annex 2.
Applicability
7. These instructions shall be applicable from April 1, 2024 to all Commercial Banks (excluding Regional Rural Banks).
Yours faithfully,
(Usha Janakiraman)
Chief General Manager
