Market risk can be defined as the risk of losses in on and off-balance sheet positions arising from adverse movements in market prices. From a regulatory perspective, market risk stems from all the positions included in banks' trading book as well as from commodity and foreign exchange risk positions in the whole balance sheet. Traditionally, trading book portfolios consisted of liquid positions easy to trade or hedge. However, developments in banks' portfolios have led to an increase in the presence of credit risk and illiquid positions not suited to the original market capital framework. To address these flaws, material changes in the market risk framework (generally known as ‘Basel 2.5') have been introduced by the CRD III. The EBA, through the publication of its guidelines intend to foster convergence in the implementation of some of these new capital requirements, namely the stressed value at risk (stressed VaR) and the incremental risk charge (IRC) introduced to adequately capture credit risk. The EBA will also draft some draft regulatory standards (RTS) to clarify and better articulate some requirements provided for in the new CRDIV/CRR text.
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