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Committee Letter Regarding the April 1995 Market Risk Proposal from the Basle Committee on Banking Supervision

William W. Wiles
Secretary of the Board
Board of Governors of the Federal Reserve System
20th Street and Constitution Avenue, N.W.
Washington, D.C. 20551

July 25, 1995

Dear Mr. Wiles,

The Foreign Exchange Committee (the "Committee") appreciates the opportunity to submit the attached comments on the April 1995 market risk proposal from the Basle Committee on Banking Supervision. This commentary expresses the collective opinions of the Committee's membership. The Committee recognizes that the task of generating international capital guidelines for market risks is difficult and complex. We congratulate the Basle Committee on Banking Supervision for its commendable progress in drafting these guidelines.

The Committee's letter focuses on the proposed standards for using internal bank models to calculate regulatory capital held against market risk. While the Committee wholeheartedly approves the use of internal models to calculate capital, the Committee has two principal comments on the Basle Committee's proposal:

  1. The levels of capital generated by the proposal's highly conservative quantitative standards are unduly burdensome, significantly greater than historical risks in the foreign exchange market.

  2. The proposed regulatory model may not be used for day-to-day risk management and may prove impossible to validate using the proposed risk parameters.

Given these concerns, Committee members recommend that banks should be able to use their validated internal models to calculate regulatory capital requirements. Regulators could adjust these calculations with a multiplication factor after reviewing each bank's internal model and validation procedures. The attached comment letter provides a more detailed explanation of these general observations. We hope that the Basle Committee on Banking Supervision will find these comments helpful.

Also attached for your information is a list of the Committee's 1995 membership. Please feel free to contact me or the Committee's Executive Assistant regarding any aspect of our comments.

Sincerely yours,

Lewis W. (Woody) Teel
Chairman