a Fundamental Review of Capital Charges associated with trading activities

Strengthening the capital that banks are required to hold to absorb losses from their trading and derivatives activities is a key component of the agenda for the reform of the global financial system. The global financial crisis revealed several shortcomings in the existing prudential framework for capitalizing banking activities, which is based on internationally agreed minimum standards (commonly referred to as Basel II) published by the Basel Committee on Banking Supervision (BCBS 2006). In particular, it became clear that many large banks did not hold sufficient capital to absorb the significant trading and credit-related losses they suffered, and many also lacked an adequate liquidity buffer to absorb the risks they faced in wholesale funding markets. To address these shortcomings, the BCBS is implementing a range of reforms (many of which are collectively referred to as Basel III) designed to augment both capital and liquidity.1 The reforms will significantly increase the level, quality and consistency of capital and improve the degree of risk coverage.