Media Release Capital Adequacy of Banks: Market Risk

The Reserve Bank's guidelines covering capital requirements for market risk will come into force from 1 January, 1998. These guidelines, which follow closely the recommendations of the Basle Committee on Banking Supervision, require banks to hold capital against the risk of loss from changes in interest rates, foreign exchange rates, equity prices and commodity prices. The guidelines were released to banks in January 1997 as Prudential Statement C3 ‘Capital Adequacy of Banks: Market Risk’ and will apply, in conjunction with the existing capital requirements covering credit risks, to all locally-incorporated banks.

Under the new arrangements, banks have a choice in determining their market risk capital requirement. They may use either a standard method (which is described in the guidelines) or their own risk measurement model based on a Value-at-Risk (VaR) approach. Banks seeking to use their own models need to satisfy the Reserve Bank that the models in question meet a number of criteria, and that the wider control environment in which they are used is adequate.

The Reserve Bank has agreed that ten banks may use their own models to calculate capital requirements for market risk from the beginning of 1998. Several other banks, which have initially chosen the standard method, have indicated that they will seek recognition for their own models during the coming year.

Australia is one of the first countries to implement the option of allowing banks' internal VaR models in calculating the regulatory capital charge.

Additional capital needed by banks to satisfy the new requirements will be small in aggregate, compared to the existing capital of the banking system. For some individual banks, required capital could even fall slightly as the benefits of additional offsetting between exposures, not permitted at present, more than compensate for the extra capital required to support their market activities.


Manager, Information Office
Reserve Bank of Australia
(02) 9551 9720

Mr LJ Austin
Assistant Governor
(Financial Institutions)
(02) 9551 8500