PRA relief blunts market risk surge at Barclays, StanChart

Market risk-weighted assets (RWAs) leapt higher at Barclays and Standard Chartered in the first quarter, though not as much as they would have done without the targeted relief granted by the UK’s Prudential Regulation Authority (PRA).

Market RWAs, as calculated under the internal models approach (IMA), jumped 36% to £24.2 billion at Barclays over the first three months of the year, and 6% to $12.1 billion at Standard Chartered. Standardised approach market RWAs increased 9% at Barclays to £14.2 billion and 4% at StanChart to $9.8 billion.

The IMA component of each bank’s market RWAs were pushed higher by value-at-risk (VAR) and stressed VAR (SVAR) requirements, reflecting the tumultuous trading conditions that characterised Q1 and a ramp up of client activity. The VAR-based requirement increased 33% at Barclays quarter-on-quarter and 80% at StanChart, while their SVAR-based requirements climbed 44% and 28%, respectively. 

 

These RWA uplifts were offset slightly at each bank by deductions to their risks-not-in-VAR (RNIV) requirements. RWAs included in this category reflect hard-to-model trading risks. On March 30, the PRA allowed banks to cancel out increases to their VAR- and SVAR-based measures, caused by model backtesting exceptions, by taking an equivalent amount out of their RNIV requirements.

StanChart disclosed a $2.2 billion drop in its RNIV RWAs quarter-on-quarter related to the PRA relief. Without this offset, its IMA market RWAs would have been 18% higher. 

IMA market RWAs labelled ‘other’ at Barclays, a category that includes RNIV, actually increased over the first quarter 131% to £3.9 billion. But the bank did attribute £2.9 billion of RWA reductions across all components to ‘methodology and policy changes’, which likely capture the impact of the PRA relief. Without these offsets, Barclays’ IMA RWAs would have been 11% greater.

 

What is it?

Market RWAs calculated under the IMA consist of four components – a VAR- and SVAR-based requirement, an incremental risk charge and RNIV measure.

The VAR- and SVAR-based RWA amounts are calculated by applying a multiplier to banks’ own model outputs. If a bank incurs five or more VAR model backtesting exceptions in a 250-day period, which happens when actual trading losses exceed those estimated, the multiplier increases. This ratchet mechanism is intended to punish banks with VAR models that consistently undershoot their true exposures.

However, exceptional market volatility in the first quarter inflicted a host of backtesting exceptions that threatened to push market RWAs to record highs. To prevent automatic multiplier increases from making the regulatory capital burden of trading intolerable, the PRA allowed banks to offset these by deducting the same amount of RWAs from RNIV requirements.

Why it matters

The UK watchdog judged that if market RWAs built up too much through the coronavirus crisis, banks could step back from the market out of fear their capital limits would be breached. Even with the RNIV relief, however, the increase in RWAs was extreme.

To put things in perspective, market RWAs climbed three times as fast as credit RWAs at Barclays over the quarter, and over five times as fast at StanChart. If these trends continue, the banks may be incentivised to evict certain trading positions and become more choosy about who they deal with to avoid the capital burden becoming too great.

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• Topics
• Barclays
• Capital adequacy
• Capital requirements
• Market risk
• Market risk modelling
• Prudential Regulation Authority (PRA)
• Standard Chartered
• Stressed value-at-risk (SVAR)
• United Kingdom (UK)
• Value-at-risk (VAR)
• Risk Quantum
• Banks
• Covid