) for trading book risks, which will supplement the existing value - at - risk modelling framework and introduction of a stressed var requirement, using historical data from a one - year period of significant losses. securitisation exposures have been made subject to a much stringent banking book charge based on credit ratings, and the specific risk capital changes for securitisation and re - securitisation have been enhanced. 27. in the us, the comprehensive dodd - frank act has been enacted which addresses, among others, the issue of separation of proprietary trading from banks – the volcker rule. the act contains a diluted version of the original volcker proposal, which will restrict banks ’ proprietary trading 1, impose additional capital requirements on shadow banks engaged in proprietary trading, and restrict banks ’ ownership stakes in hedge funds and private equity funds. banks are allowed to own or sponsor hedge funds and private equity funds and even to invest in them as long as their holdings didn ’ t account for more than 3 percent of the bank ’ s capital or 3 percent of the fund ’ s capital. 28. there have been concerted attempts at addressing the adverse incentives available to senior, secured creditors of banks. it is being accepted, much to the chargin of markets, that investments in market - based instruments such as bonds do not imply complete protection in default cases. “ bail - in ” provisions, which would require the senior bondholders to write - down the value of their investments albeit after the equity holders have taken the losses, are being discussed as viable options. 29. in regard to addressing concentration of risk in the ccps, work presently being undertaken by fsb and bcbs include proposals for capital requirement on banks for contribution to default guarantee funds maintained by ccps based on the amount of initial margin posted with the clearing house and its own financial resources. it is being argued that capital benefit to market participants should be provided only for the transactions settled through those ccps which are fully compliant with the principles enunciated by cpss and iosco. the exposure to non - compliant ccps would attract higher capital charge. indian context 30. in india, the bank balance sheets are relatively less aligned with capital market – both on the asset side as well as liability side. capital in the form of subordinated debt and other non - equity instruments constitutes only around 38 per cent of total capital. issuance of such instruments is restricted by the limit on non - equity elements of regulatory capital. the investments

interface between banks and financial markets which has undergone a fundamental shift in the recent times – banks have become intricately linked to financial markets and hence more susceptible to strains in financial markets ; at the same time, functioning of markets has become intricately linked to banks which then emerge as the receptacle for most of risks within the financial markets. banks getting linked to capital markets 6. banks ’ increasing interdependence on the capital markets was largely driven by the gradual blurring of lines between commercial banking and investment banking in developed markets. adoption of the universal banking model and the repeal of the glass - steagall act in the us largely settled the debate at the time. the transition had a significant impact on the balance sheet profiles of banks which became more exposed to market forces and the incentive frameworks clearly worked to favour this. bis central bankers ’ speeches assets 7. increased recourse to “ originate and distribute ” model of asset creation and increased reliance on wholesale, market funding of balance sheets were two most evident signs of this shifting paradigm and which also contributed significantly to the intensification of the global crisis. 8. the “ originate and distribute ” model was at the heart of complex securitization and credit derivative structures that accentuated the crisis. the underlying incentive at work behind the engineered supply of highly rated instruments was the regulatory framework for capital adequacy. the instruments of financial engineering had provided a simple mechanism to convert a portfolio of loans originated by the entity into tranched securities with differential ratings. there seemed to be an insatiable demand for highly rated instruments and the underlying nature and risks of the instruments were not important as long as the rating agencies assigned the required ratings. the ironical feature was that most of these structured high - quality securities were held within the banking system itself as for banks, investing in these securities was much more optimal from the capital perspective than holding on to the loans originated by them. it was a reverse maturity transformation in action on the asset side – long term assets getting re - transformed into shorter duration marketlinked instruments. 9. at a more fundamental level, the above trend was supported by the conception of treating financial risks as commoditised products which can be transferred and traded in the market. from this perspective, all that should matter is the ultimate risk exposure and not the nature of the underlying transaction. originating loans was, thus, treated on par with taking on credit exposure through purchase of bonds or even writing of credit protection through credit