With the new year upon us, the buzz surrounding the finalization of the Basel Committee on Banking Supervision’s (BCBS) Fundamental Review of the Trading Book: A Revised Market Risk Framework (FRTB) guidelines—along with the significant impact they are expected to have—continues to take on a center stage of its own.
Interestingly, just before Thanksgiving here in the United States, the Basel Committee released its long-awaited interim impact study, looking at some of the effects of FRTB. The report assesses the impact of proposed revisions to the market risk framework, as set out in two previously published consultative documents.
Most notably, this report assesses the capital impact based on a sample of 44 banks, providing usable data for the study. In summary, the report concluded that “…the change in total non-securitisation market risk capital charges would be equivalent to a 4.7% share of the overall Basel III minimum capital requirement (i.e., for credit risk, operational risk, market risk, etc).”*
However, market participants around the globe are most focused on the specific market risk impact, which would potentially be much higher. In fact, according to the report, “Compared to the current market risk framework, the proposed market risk framework would result in a weighted average increase of 74% in aggregate market risk capital charges.” (based on the sample of 44 banks in the study.) The report further states that when measured as a simple average, this increase in the total market risk capital requirement is 41%. For the median bank in the same sample, the capital increase is 18%.”*
It’s no surprise that all eyes remain focused in anticipation on the finalization of the FRTB guidelines, in the painful aftermath of this study. Financial institutions around the globe find themselves scurrying to plan for the broad impact FRTB could have on capital requirements, P&L and derivative business strategy in the years to come.
Faced with the challenges of tons of additional calculations, huge amounts of data to be managed, and better data quality—the prevalent trend emerging amongst financial institutions has been, not surprisingly, IT infrastructure planning in forward preparation for the imminent FRTB guidelines.
Will your organization be adequately prepared to meet the ever-increasing risk and regulatory capital calculation requirements set forth in the revised market risk framework?Though FRTB implementation timeframes have been extended out through 2019, it’s something derivative practitioners must be thinking about and preparing for— today. Let’s face it, Rome certainly wasn’t built in a day.
*See section 2.1 for full study http://www.bis.org/bcbs/publ/d346.pdf