
FRTB: Are we there yet?

In early October, figures from the Basel Committee on Banking Supervision confirmed what banks have known for some time: the Fundamental Review of the Trading Book (FRTB) will spark a vast increase in the cost of market-making to the point that, for some products, it will no longer make sense to continue doing so.
The Basel Committee’s survey of almost 100 banks must have gone down as smoothly as a pint of icy seawater for dealers still waiting anxiously for the rules to be finalised before year-end. The largest lenders – so-called global systemically important banks, or G-Sibs – can expect their market risk capital requirements to increase by more than half under the regime; one unlucky G-Sib faces an increase of 160.5%.
For smaller lenders – those currently holding Tier 1 capital of less than €3 billion – the numbers are even more eye-watering: the average increase for this cohort is 76.4%. Dealers will probably feel a mix of pity and schadenfreude for the bank facing a 469.5% increase in market risk capital.
Little wonder then that banks in many smaller regional markets – those obliged to implement Basel standards as Group of 20 signatories, but lacking the deep and mature capital markets of other jurisdictions – have called on global watchdogs to moderate the standardised approach that most will opt for, decrying the methodology as too complex.
Basel has given some ground here: in its consultation published earlier this year, which effectively reopened the regime for further amendments, the watchdog lowered the risk weights applied to certain asset classes under the standardised sensitivities-based approach, while also clarifying and simplifying the treatment of less liquid foreign exchange pairings – a bugbear for emerging market banks.
It remains to be seen whether the Basel Committee will make adopting its simplest iteration of the rules – the reduced sensitivities-based method – an option for all but the smallest banks, as is currently the case.
On one other critical aspect of the rules, however, Basel has so far remained unmoved: the treatment of non-modellable risk factors (NMRFs). Under the rules, NMRFs that lack enough data to be priced accurately under the internal models approach, and therefore face punitive capital add-ons on top of model-generated requirements.
The aggregate impact of these add-ons is driving a large part of the increase in the minimum capital banks expect to see under the regime – perhaps a much higher proportion than many dealers have cared to admit. Where banks had previously estimated up to one-third of the increase could be driven by NMRFs, some dealers now admit more than half the jump in minimum requirements could be driven by add-ons.
That makes minimising NMRFs the top priority for banks but, unfortunately, the scope for doing so within the regulation looks limited. To qualify as modellable, a risk factor must be supported by 24 price observations during the course of a year, which cannot be more than a month apart. Banks’ biggest gripe with this definition is its failure to take account of seasonality: trading in a given market being concentrated at a particular time of year, otherwise being punctuated by long lulls over the summer period.
However, in its consultation, the Basel Committee claimed it had seen no evidence of the “materiality” of the impact of seasonality, adding it was not minded to not make any changes to the framework unless it was presented with “compelling evidence” that any were needed.
As Anna Holten Møller, senior analyst for market risk at Denmark’s Nykredit, puts it, banks still have work to do on “convincing regulators that seasonality is real”.
Only users who have a paid subscription or are part of a corporate subscription are able to print or copy content.
To access these options, along with all other subscription benefits, please contact info@risk.net or view our subscription options here: http://subscriptions.risk.net/subscribe
You are currently unable to print this content. Please contact info@risk.net to find out more.
You are currently unable to copy this content. Please contact info@risk.net to find out more.
Copyright Infopro Digital Limited. All rights reserved.
As outlined in our terms and conditions, https://www.infopro-digital.com/terms-and-conditions/subscriptions/ (point 2.4), printing is limited to a single copy.
If you would like to purchase additional rights please email info@risk.net
Copyright Infopro Digital Limited. All rights reserved.
You may share this content using our article tools. As outlined in our terms and conditions, https://www.infopro-digital.com/terms-and-conditions/subscriptions/ (clause 2.4), an Authorised User may only make one copy of the materials for their own personal use. You must also comply with the restrictions in clause 2.5.
If you would like to purchase additional rights please email info@risk.net
More on Regulation
Why US banks are not taking their eye off reputational risk
The concept may be removed from supervisory exams, but the 2023 crisis showed the risk is real
Mr Bessent goes to Basel: the fate of global bank regulation
US resistance to international standards could spark greater fragmentation of prudential rules
Frustration grows over ‘messy’ active account rules
Isda AGM: Less than two months until deadline, firms seek clarity on threshold calculation and scope of exemptions
Citadel exec questions regulatory findings on repo haircuts
Isda AGM: OFR analysis didn’t account for excess collateral held against cleared positions in related trades
US exchanges fight SEC fee caps in court
Cboe and Nasdaq expected to defend rebates that critics say impede market efficiency
EC to decide on FRTB delay within ‘days’
Isda AGM: Consultation finds support for delay, with some wanting to go live with targeted changes
Fed official: SLR tweaks likely unbundled from Basel III
Isda AGM: Complexity of the endgame proposals mean any leverage ratio changes will probably be proposed separately
BoE to consult on promoting clearing for gilt repo market
Isda AGM: Deputy governor also takes aim at bilateral repo haircuts and cross-CCP netting