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Framework for applying capital requirements to market risks

III. Consolidated supervision of market risk

22. The Committee has for some years strongly supported the concept of consolidated supervision of risk on the grounds that problems in one affiliate could well have a contagion effect on the group as a whole. Consolidated supervision reduces the scope for risks to escape measurement by being held in unsupervised locations and ensures banking groups have group capital to support all their risks, so preventing excessive gearing up on the same capital base. Consistent with the principle of consolidated supervision, it is proposed that supervisors have discretion to permit banking and financial entities in a group which is running a global consolidated book and whose capital is being assessed on a global basis to report short and long positions in exactly the same instrument (e.g. currencies, equities or bonds), on a net basis, no matter in which location they are booked. 9

23. Nonetheless, because such reporting might well lead to a reduction in the capital charge for market risks by allowing positions in different affiliates to offset, supervisors need to be alert to the possible understatement of risk. This may occur, for example, where there are obstacles to the repatriation of profits from a foreign subsidiary, where there are potential tax liabilities or where a bank's ownership is less than 100%. In such circumstances, supervisors would be expected to demand that the individual positions be taken into the measurement system without any offsetting against positions in the remainder of the group. Moreover, all supervisory authorities would retain the right to continue to monitor the market risks of individual entities on a non­consolidated basis to ensure that significant imbalances within a group do not escape supervision.

24. The Committee is well aware that banks can reduce positions at the close of business by engaging in a transaction with an affiliate in a later time zone (i.e. "passing". its position). This may be a perfectly legitimate device to enable banks to manage their positions continuously to reduce intra­group imbalances. If all positions were measured at the same moment in time no problem would arise. In practice, however, reporting is likely to take place on the basis of accounts drawn up at the end of a business day and it is possible, by passing a position continuously west and over the date­line, for an exposure to escape reporting altogether. Supervisors will, therefore, be especially vigilant in ensuring that banks do not pass positions on reporting dates to affiliates whose positions escape measurement or across the international date­line.

Footnotes:

9. The positions of less than wholly­owned subsidiaries would be subject to the generally accepted accounting principles in the country where the parent company is supervised.

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