**Policy Summary: Review of Trading Book Capital Adequacy Guidelines**
This circular, DOR.MRG.REC.800000003202324, issued by the Reserve Bank of India (RBI) on February 28, 2024, addresses amendments to capital adequacy guidelines for all Commercial Banks excluding Regional Rural Banks, specifically concerning the trading book. It aligns the capital adequacy guidelines with the Master Direction Classification, Valuation and Operation of Investment Portfolio of Commercial Banks Directions, 2023 (MD on Investment) issued on September 12, 2023, which provides a clearly identifiable trading book under the Held for Trading (HFT) accounting sub-classification and introduces AFS reserve which would be part of regulatory capital.
The Master Circular Basel III Capital Regulations dated May 12, 2023, and Master Direction Prudential Norms on Capital Adequacy for Local Area Banks Directions, 2021 dated October 26, 2021 have been modified accordingly, as detailed in Annex 1 and Annex 2, respectively. While draft guidelines on Minimum Capital Requirements for Market Risk under Basel III were released on February 17, 2023, the final guidelines on Market Risk Capital Requirements Simplified Standardised Approach will be implemented later with separate detailed guidelines. The definition of trading book for capital adequacy purposes will be as provided in Annex I of MD on Investment. The extant market risk capital requirements have been recalibrated by introducing intermediate scalers.
These instructions take effect from April 1, 2024. Usha Janakiraman, Chief General Manager, is the contact person for inquiries.
Key Entities Referenced
Reserve Bank of India: The central bank of India, responsible for regulating the banking sector.
Commercial Banks: Banks excluding Regional Rural Banks, subject to the guidelines outlined in the notification.
Regional Rural Banks: A type of scheduled commercial bank in India, specifically excluded from certain provisions in the document.
Basel III Capital Regulations: International regulatory framework for banks, aimed at strengthening bank capital requirements.
Master Direction Prudential Norms on Capital Adequacy for Local Area Banks Directions, 2021: A regulatory document issued by the Reserve Bank of India concerning capital adequacy for Local Area Banks.
Master Direction Classification, Valuation and Operation of Investment Portfolio of Commercial Banks Directions, 2023: A regulatory document concerning the classification, valuation, and operation of investment portfolios of commercial banks.
Market Risk Capital Requirements Simplified Standardised Approach: An approach for calculating capital requirements for market risk, as part of the Basel III framework.
Usha Janakiraman: Chief General Manager at Reserve Bank of India
भारतीय �रज़व� ब�क
_________________________RESERVE BANK OF INDIA ______________________
www.rbi.org.in
RBI/2023-24/128
DOR.MRG.REC.80/00-00-003/2023-24 February 28, 2024
All Commercial Banks
(excluding Regional Rural Banks)
Dear Sir / Madam,
Capital Adequacy Guidelines – Review of Trading Book
Please refer to Master Circular – Basel III Capital Regulations dated May 12, 2023,
and Master Direction – Prudential Norms on Capital Adequacy for Local Area Banks
(Directions), 2021 dated October 26, 2021 (hereinafter together referred to as ‘capital
adequacy guidelines’).
2. As you are aware, the Master Direction - Classification, Valuation and Operation of
Investment Portfolio of Commercial Banks (Directions), 2023 dated September 12,
2023 (hereinafter referred as ‘MD on Investment’) inter alia provides a clearly
identifiable trading book under ‘Held for Trading (HFT)’ accounting sub-classification
and introduces AFS-reserve which would be part of regulatory capital. In view of the
changes cited above, it has been decided to amend the capital adequacy guidelines
in alignment with the MD on Investment.
3. Accordingly, the provisions of Master Circular – Basel III Capital Regulations have
been modified as provided in Annex 1.
4. It may be noted that ‘Draft Guidelines on Minimum Capital Requirements for Market
Risk – under Basel III’ providing inter alia ‘Definition of trading book’ and ‘Market Risk
capital Requirements – Simplified Standardised Approach’ were released on February
17, 2023 for public comments. While the revised definition of trading book for the
purpose of capital adequacy will be as provided in Annex I of MD on Investment, the
final guidelines on ‘Market Risk Capital Requirements – Simplified Standardised
Approach’ will be implemented at a later date and detailed guidelines will be issued
separately.5. Considering the transition to ‘Market Risk Capital Requirements – Simplified
Standardised Approach’, the extant market risk capital requirements have also been
recalibrated by introducing intermediate scalers. Banks should keep this in view while
reviewing their strategies and capital planning measures.
6. Further, the provisions of Master Direction – Prudential Norms on Capital Adequacy
for Local Area Banks (Directions), 2021 have been modified as provided in Annex 2.
Applicability
7. These instructions shall be applicable from April 1, 2024 to all Commercial Banks
(excluding Regional Rural Banks).
Yours faithfully,
(Usha Janakiraman)
Chief General Manager