Basel Committee Finalizes FRTB Rule

Last Thursday, January 14th, the Basel Committee on Banking Supervision (“BCBS”) published the final rule relating to its fundamental review of the trading book (“FRTB”). The revised market risk framework comes into effect on January 1, 2019.

The key features of the revised framework include:

  • A revised boundary between the trading book and banking book
  • A revised internal models approach for market risk
  • A revised standardised approach for market risk
  • A shift from value-at-risk to an expected shortfall measure of risk under stress
  • Incorporation of the risk of market illiquidity

An explanatory note on the minimum capital requirements for market risk has also been published to provide a description of the rationale and main features of these new revisions.

The explanatory note specifically touches on securitization exposures on pg. 11, stating “On a weighted average, the capital charge for securitisation exposures (excluding the correlation trading portfolio) under the revised market risk framework is 22% higher than under the current market risk capital standard. The capital charge for correlation trading portfolio securitisation exposures under the revised framework is 70% higher compared with the current market risk framework.”

According to a recent Risk article, “[e]ven for banks using the simpler, standardised approach, the overall picture is mixed. While risk weights for credit exposures have been scaled down, certain risk weights for interest rate and foreign exchange risk factors have increased.”

SFIG will analyze the proposal through its Financial Intermediaries Committee, then work with its coalition partners to inform policymakers of the industry’s view of the potential consequences of the rules. As a reminder, the prudential regulators, led by the Federal Reserve, will likely run a rulemaking process here in the U.S. to tailor the standard to fit our jurisdiction. However, as you are well aware, U.S. regulators have been conservative in implementing Basel capital rules.

SFIG will set up meetings in the near future to examine the rule and discuss advocacy strategy. Please contact with any questions regarding SFIG’s advocacy efforts.

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