Regulatory Guide to Understanding Bank Capital and Margin Requirements

Extensions and revisions of bank capital and margin requirements have given rise to increased interest in capital calculations and the methods employed. Developed by Dr. Serguei Issakov, Global Head of Quantitative Research at Numerix, the below features two diagrams which map out the landscape of bank capital and margin requirements.

In this chart we list the three components of capital calculation for bilateral trades applying to Market Risk, Counterparty Credit Risk, and CVA Capital. Capital for centrally cleared trades, as well as margin for bilateral trades are also represented. For each type of capital and margin the standardized and internal model approaches are examined. In each box we link to the latest regulatory guidance, indicate the year when a particular requirement was issued and where appropriate the dates when the requirements are in effect. We also include what disclosure reports particular capital requirements have to be reported in.

*MR1, MR2, MR3, CCR1, CCR2, CCR3, CCR7, CCR8 are reports to disclosure capital requirements – from: Methodology & Basel Pillar 3 disclosure reports (d309 (2015)) – in effect in year-end 2016 financial report

**BCBS d362: Basel Committee proposes measures to reduce the variation in credit risk-weighted assets

This second chart outlines the current market considerations for Capital Value Adjustment (KVA) and Margin Value Adjustment (MVA). KVA and MVA reflect the cost of capital and margin, respectively, throughout the whole life of a portfolio. KVA and MVA in the second diagram correspond to the regulatory capital and margin definitions in the first diagram. Note, Margin requirements for CCPs are not unified across CCPs and not presented.