The Basel Committee on Banking Supervision plans to tighten up how banks hold capital reserves against their securities trading books. A consultative document recently published from Basel called for “a more objective boundary between the trading book and the banking book that materially reduces the scope for regulatory arbitrage”, as well as “comprehensively incorporating the risk of market illiquidity”.
In the wake of the 2008 financial crisis, a number of eurozone banks moved assets from their trading books, where they must be marked to market, onto banking books, which are subject to less volatile cash-flow accounting. This trend may intensify with the onset of Basel III, which assigns a greater weight to market risk when calculating a bank’s capital needs. The fear in Basel is that banks will then hold insufficient capital against potential losses on securities portfolios.
