Pilot exercise - pre-commitment approach to market risk

An international group of 10 banking organizations participated in a pilot of the pre-commitment approach to capital requirements for market risks. The pilot left the participating institutions with 3 core conclusions: 1. that the pre-commitment approach is a viable alternative to the internal models approach for establishing the capital adequacy of a trading business for regulatory purposes, 2. that, for progress to be made, it is essential that the bank regulatory agencies participate actively with the banking industry in the effort to refine how the pre-commitment approach would be implemented in practice, and 3. that the most important remaining question requiring an answer is what penalty would result for an institution that incurs losses in its trading business exceeding its pre-committed amount for a related period.