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Are you ready for Market Risk-FRTB ICAAP changes under Basel 3.1/Basel IV/CRR III & CRD VI/B3E/Finalised Basel

We have a deployable Excel-based solution built to help you.

The Fundamental Review of the Trading Book (FRTB) is the revised Market Risk Framework by the Basel Committee for Banking Supervision (BCBS) to calculate minimum capital requirements for Market Risk.

The new Standardised Approach (SA) calculation has been designed to make it more Risk-sensitive than the previous Basel 2.5 requirements.

The new SA methodology uses a three-pillar approach to capture the following:

• i - Default Risk Charge (DRC) – Defined DRC based on category of risk classes.
• ii - Market Risk Capital Charge – Sensitivities-based Method (using pricing / valuation models – mark to market)
• iii - Residual Risk Add-on – For unforeseen risks and can be seen as a cushion.

With the introduction of FRTB, all banks with market risk (including equity risk, interest rate risk, currency risk, and commodity risk) must assess their capital using the SA. 

Even where a bank uses internal models, they also need to calculate SA to comply with the "output floor" banking regulation. (The output floor essentially limits the capital benefit a bank can gain from using its own internal risk models, ensuring a minimum level of capital is maintained based on standardized methods.)

In jurisdictions where FRTB has not yet been introduced, this model can also help banks prepare by calculating the delta from the old capital regime to the new capital regime. This is important as many banks are of the view that their market risk capital will increases under FRTB.

RiskTAE’s Basel ICAAP Capital Model calculates SA capital under FRTB. It is a deployable Excel-based solution, and built for real-world use.

If you wish additional details or a walkthrough, please contact me.

In the next few articles, I’ll continue to discuss issues related to the Standardised Approach (SA) under FRTB in further detail.  

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

Email: mark.dougherty@risktae.com