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FRTB under Basel IV - Article 2 - A Regulatory Backdrop - How did we get here?

FRTB (Fundamental Review of the Trading Book) under Basel IV* - New required Market Risk capital calculation methodology – Regulatory Backdrop - How did we get here?

Regulatory Backdrop - How did we get here? – The Journey

This is the second in a series of postings by RiskTAE on FRTB under Basel IV.  

Subsequent to Basel I’s issuance in 1988, there was a 1996 Amendment to Basel I in order to incorporate market risks.

After the 2008-2009 financial crisis, many banking supervisors were of the view that that the regulatory capital for market risk was not adequate to fully cover market risks. As a result, in July 2009 Basel 2.5 was issued as a revision to the market risk framework. Since then, many have thought that Basel 2.5 was deficient.

The result is Basel IV for Market Risk, which is also known as the Fundamental Review of the Trading Book (FRTB). It is intended to harmonize the treatment of market risk across national jurisdictions and is anticipated to generally result in higher global capital requirements. Given its size, the focus was firstly (and rightly) on Credit Risk and then the next piece in the Basel IV jigsaw was to address the myriad of changes in market risk. This is why it is called the “Fundamental Review”. There were many challenges in drafting FRTB. For example, there was unprecedented push back due to Non-Modellable Risk Factors (NMRF) as well as for P&L attribution as these tests were seen as unworkable and impossible for many desks to pass.

While some believe that the FRTB revisions did not go far enough in some areas they are still viewed as much improved over Basel 2.5.

Basel IV Market Risk/FRTB’s implementation date varies based on the jurisdiction. For details, see RiskTAE’s posting # 1 entitled “FRTB under Basel IV* - New required Market Risk capital calculation methodology - A confused and staggered Global Timeline”          

Conclusion

Basel IV and FRTB is the most wide-raging comprehensive reformation package especially in the context of data management challenges in the history of the Basel regulations and all-encompassing preparatory work will be required for all areas of the financial institution.

RiskTAE would be glad to discuss your requirements as we have a team of seasoned Risk professionals to deliver solutions.     

Do you require any further training, consultancy, or recruitment on FRTB and Basel IV?

RiskTAE can provide on-site training on premise anywhere in the world and can cover many topics across Risk, Governance and Compliance.   

Course outlines are available by emailing: education@risktae.com

For all other enquiries, including consulting and recruitment, please email us at: info@risktae.com

RiskTAE has also partnered with an international banking education firm that can provide Basel IV and FRTB Online Self Study courses.

Course outlines for the Self-Study courses are also available by emailing: info@risksexplained.com

Or, you can go directly to the web site: www.risksexplained.com

* - Basel IV is now part of the regular vernacular. Basel IV is not a single regulatory framework, but rather a collection of changing international banking standards. In fact, the Basel Committee views these reforms as simply completing the Basel III Accord and contests the use of the unapproved term ‘Basel IV’. The Basel Committee itself calls them simply "finalised reforms" and the UK Government has called them "Basel 3.1". Critics of the reform, in particular those from the banking industry, argue that Basel IV will most likely require a significant increase in capital and should be treated as a distinct round of reforms being introduced by the Bank for International Settlements (BIS) and its Basel Committee on Banking Supervision (BCBS).

Reference: 2 - FRTB Article/Post # 2 - RiskTAE - Topic - FRTB - Regulatory Backdrop

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