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Ready for New FRTB Market Risk under new Basel 3.1/Basel IV/CRR III & CRD VI?

Under Basel 3.1/Basel IV/CRR III & CRD VI/B3E, Basel III Finalised Reforms, etc., the Basel Committee on Banking Supervision (BCBS) has introduced the new Fundamental Review of the Trading Book (FRTB) framework for calculating the market risk capital charge.

In FRTB, the new Boundary Trading Book and Banking Book Rules will limit the potential for regulatory-related arbitrage.

The changes include:

• Stringent rules for internal transfers between the trading book and banking book.
• Defining a new boundary system based on a bank’s intent at acquisition: (i) To trade an asset (goes to trading book per new set of criteria for assessing trading intent), or (ii) or to hold an asset to maturity (goes to banking book).
• The framework introduces a presumptive list of assets that should be placed in the trading book unless there is a justifiable reason not to do so. And, certain instruments will have to be assigned to the trading book. This is hard coded.

The FRTB provisions are intended to limit an institution’s ability to execute regulatory-related arbitrage. That is, to move illiquid assets from its trading book (where assets must use mark to market) to its banking book (uses historic cost). Thereby, avoiding higher capital charges if placed in the trading book. 

That said, it is not clear that the revised boundary setting will be completely effective in reducing all such positioning in all jurisdictions because national regulators are given discretion in defining asset lists.  

RiskTAE has launched a pre-built, low one-off cost, Excel-native and fully transparent ICAAP model. It gives you full control, clear ownership and rapid deployment, so you can start assessing FRTB capital impact in weeks, not months.

If you wish more details, please see the graphic.

In the next few articles, I’ll continue to discuss issues related to the new FRTB capital requirements in further detail.  

* The so called “Basel IV*” Accord is known by various different names, including: Basel 3.1 (in the UK), Basel IV, CRR III & CRD VI (in the EU), B3E (Basel III Endgame in the USA), Basel III Finalised Reforms (by the BCBS), etc.

By: Mark Dougherty, Founder & Managing Director, RiskTAE (Risk Talent, Risk Advisory & Risk Education)

Email: mark.dougherty@risktae.com