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Proposal To Issue A Supplement To The Basel Capital Accord To Cover Market Risk

II. Main comments received in the consultative process

5. The Committee received many valuable and constructive comments on its April 1993 proposal, and it thanks those who responded. Nearly all the commenters accepted the logic of extending the 1988 Capital Accord to cover market risks and agreed with the concept of applying capital charges to open positions. There were, however, a number of important common underlying themes which the Committee felt to be worthy of a considered response. These were, in brief, that:
  • the proposal did not provide sufficient incentive to improve risk management systems because it did not recognise the most accurate risk measurement techniques;
  • the proposed methodology did not take sufficient account of correlations and portfolio effects across instruments and markets, and generally did not sufficiently reward risk diversification;
  • the proposal was not sufficiently compatible with banks' own measurement systems;
  • there is a need to widen the scope of the institutions subject to the rules to include, notably, major securities firms.

6. A strong common theme among the responses was the argument that proprietary risk management models developed by some of the more sophisticated banks produce far more accurate measures of market risk and that there would be costly overlaps if those banks were required to calculate their market risks in two different ways. A supporting argument was the risk that the proposed measurement framework and resulting capital charges might impede development of sound risk management practices within the banks.


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