The Standardised Approach

Sanjay Sharma and Andrew McClelland

“The fear that individuality will be crushed out by the growing ‘tyranny’ of standardisation is the sort of myth which cannot withstand the briefest examination” – Walter Gropius

FRTB’s SA is based on risk sensitivities and represents a significant methodological improvement over previous approaches for the estimation of capital charges. An SA-based capital charge has three components: sensitivities-based charge; DRC; and RRAO. The formulation of SA has been guided by several overarching objectives, including: facilitating consistent and comparable reporting of market risk across banks and jurisdictions; enabling banks with relatively small trading platforms to calculate capital requirements without the need for sophisticated measurement frameworks; credible fallback and floor if a bank’s internal model is disapproved by supervisors; and its general use as an add-on or floor to an internal models-based charge. SA will also capture the risks from securitisation exposures in the trading book, which are fully removed from the scope of IMA. FRTB’s rationale for conceptualising and prescribing sensitivity-based capital charge methodology is sound since, conceptually, it can be applied

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