Calibrating capital requirements is a highly complex undertaking and getting it wrong can have serious consequences. Too much lenience might lead to banks holding insufficient capital to mitigate their risks. But excess conservatism can put balance sheets under strain, forcing banks to either raise costs for end users or withdraw from certain businesses, with negative repercussions for the economy.

With such high stakes, it’s no surprise that the completion of Basel III, which includes new capital requirements for market risk, has occupied so much industry attention in recent years. In the US, the latest Basel III endgame proposal made important progress in improving risk sensitivity, but as ISDA’s recent quantitative impact study highlighted, there are still vital adjustments to be made as the rules are finalized. It’s also critical that policymakers take a pragmatic approach to implementation, allowing sufficient time for the adoption of internal models.

For market participants, implementation brings its own set of challenges, including the need to deploy capital models accurately and consistently. ISDA Capital Models Benchmarking has a proven track record in giving banks greater confidence they are using capital models in line with their peers and regulatory expectations. As the European Banking Authority (EBA) prepares to expand its market risk benchmarking exercise next year, ISDA’s offering will be available to help newly in-scope banks meet the regulator’s requirements.

With the US, EU and UK progressing towards the Basel III finish line, industry participants are calling for international consistency so that globally active banks can compete on a level playing field. For the EBA, which has set out proposals to improve the efficiency of the regulatory and supervisory framework in the EU, there is a balance to be struck between risk sensitivity, simplicity and the need for a stable and robust banking system.

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