FRTB – Special report 2020

Throughout FRTB’s troubled gestation, regulators were warned that making the internal models approach too operationally complex and capital-intensive would mean few outside the biggest banks wanted to use it – with the potentially dire consequence that all mid-sized and even some larger banks would wind up focussing liquidity provision solely on liquid benchmarks – leaving them all exposed to the same risks and underlyings when asset prices collapse.

Many warned at the time that such flaws were a consequence of an aggressive timetable when writing the rules, and would lead to suboptimal outcomes – and so it proved. FRTB’s initial timetable proved unworkably optimistic; it was hived off from the rest of Basel III; then cracked open and rewritten under a new Market Risk Group led by the Bank of England’s Derek Nesbitt, under whom banks report having earned a fairer hearing for their concerns.

Already, the start of the new regime had been pushed back to 2022; with final implementation now delayed to 2023 along with the rest of Basel III as a consequence of Covid, gauging the final impact remains a way off – and even then, its true cost will not become clear till it gets a thorough road-test in the next market meltdown.

Download the full 2020 FRTB special report in PDF format