FRTB under Basel IV Series - Article 1 - A confused and staggered Global Timeline
FRTB (Fundamental Review of the Trading Book) under Basel IV* - New required Market Risk cap
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Can you estimate the capital impact of moving to FRTB’s Standardised Approach (SA)? Additional capital?
Our Excel model gives you the answer.
Under FRTB*, the new Standardised Approach (SA) for capital calculation relies on a bank’s pricing (valuation) models (mark to market) to capture more granular and complex risk factors across different asset classes in the trading book. Including:
- Linear Risk Charge – Delta and Vega.
- Non-Linear Risk Charge – Curvature.
The new SA is more risk-sensitive than the current Basel 2.5 SA.
And, the new SA is likely to result in significantly higher capital charges for certain businesses due to its inclusion of basis risks and residual risks (not captured in Basel 2.5’s SA).
The new SA is also likely to increase regulatory capital needed due to the removal of capital credits for diversification within an asset class.
This is why some banks, for planning purposes, are already calculating the impact of FRTB’s SA on capital.
Do you know your estimated delta of additional capital required by moving to the new Standardised Approach (SA) 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.
* Basel 3.1/Basel IV/CRR III & CRD VI/B3E/Finalised Basel III.
By: Mark Dougherty, Founder & Managing Director, RiskTAE (Risk Talent, Risk Advisory & Risk Education)
Email: mark.dougherty@risktae.com
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