FRTB EXPLAINED
The Fundamental Review of the Trading Book ( FRTB ) is a set of global regulations introduced by the Basel Committee on Banking Supervision ( BCBS ).
It aims to address weaknesses in the previous trading book framework , particularly in the aftermath of the 2008 financial crisis , by enhancing risk management practices , improving capital requirements and promoting consistency across international jurisdictions . Key components of the FRTB include :
• Revised market risk framework : FRTB introduces a revised standardised approach and the use of expected shortfall under the internal models approach , which is considered to provide a more robust measure of tail risk .
• Internal models approach : FRTB retains the option for banks to use their internal models to calculate market risk capital requirements . However , it introduces stricter requirements for model approval , validation and ongoing monitoring to ensure consistency and accuracy .
• Standardised approach : In addition , FRTB allows the use of the standardised approach as an alternative method for calculating market risk capital requirements . This approach provides a simpler and more transparent method , especially for smaller institutions or those unable to meet the requirements for internal models .
• Risk sensitivities : FRTB requires banks to calculate and report risk sensitivities to various risk factors , enabling supervisors to better assess the impact of market risk on a bank ’ s trading activities .
92 May 2024