Other parts of this series:
- Fundamental Review of the Trading Book (FRTB) Rules Pose New Challenges to Banks
- Banks’ Trading Frameworks Under Pressure
- Fundamental Review of Trading Book: Three Big Issues for Banks
- Fundamental Review of Trading Book Data Issue: Risk Sensitivities Sourcing
- Fundamental Review of Trading Book Data Issue: Market Data Sourcing
- Fundamental Review of Trading Book Data Issue: Risk Calculators Data Gaps
- Fundamental Review of Trading Book Data Issue: Risk Calculators Data Gaps – Part 2
- Fundamental Review of the Trading Book: Addressing Data Challenges
- Fundamental Review of the Trading Book: Addressing Data Challenges – Part 2
- Fundamental Review of the Trading Book: Transforming Market Risk Practices
In January 2016, the Basel Committee on Banking Supervision (BCBS) published final rules for the market risk framework for capital requirements. The BCBS proposed the end of 2019 as a compliance deadline for banks with a significant presence in capital markets.1
The new rules – known as Fundamental Review of the Trading Book or FRTB – are designed to address recognized weaknesses of Basel 2.5 as they relate to issues such as the under-capitalization of the trading book, capital arbitrage between banking and trading books, and internal risk transfers. BCBS is seeking, for example, to establish a more objective boundary between the trading book and the banking book to reduce incentives for arbitrage between the regulatory banking and trading books.2 Similarly, the FRTB encompasses a revised internal model approach characterized by a shift from Value-at-Risk (VAR) to the Expected Shortfall (ES) measure of risk, for a better reflection of “tail risk” and capital adequacy during periods of significant financial market stress.3
Accenture believes that adoption of the FRTB rules presents banks with significant challenges in areas such as business operations and infrastructure provisioning, among them:
- Banks can expect significant increases (as much as 40 percent) in market risk capital requirements;
- They should also anticipate higher costs for rules implementation programs – ranging from $100 million to $250 million for large banks;
- We expect major increases in business as usual (BAU) costs due to desk level requirements; and
- Additional investment in technology infrastructure for risk calculation.
FRTB rules (see Figure 1) require banks to strengthen their existing market risk infrastructure and overall technology capabilities, with additional computational capacity to support calculations as required under new capital requirements. Banks should also plan for additional complexity in operations and processes due to changed desk structures and undertake the standardization of data sources to support these changes.
Figure 1. Expected FRTB Timeline
Source: Minimum capital requirements for market risk, BCBS, January 2016. Access at: http://www.bis.org/bcbs/publ/d352.pdf, and Accenture estimates.
The BCBS recommended deadline of December 31, 2019 may not seem imminent, but the journey to compliance is not easy. Banks should begin to address their FRTB implementation strategy immediately and plan for implementation issues going forward. In this series of blogs, we will look at major FRTB requirements and what banks should be doing to meet these compliance goals.
For more information see SlideShare deck: “Fundamental Review of the Trading Book (FRTB) – Data Challenges“
- “Minimum Capital Requirements for Market Risk,” Basel Committee on Banking Supervision, January 2016. Access at: http://www.bis.org/bcbs/publ/d352.htm
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