EBA to Revamp FRTB’s P&L Test

According to a recent Risk.net article, the European Banking Authority (EBA) will be taking a grounds-up approach as it revamps a crucial test for banks that want to model their market risk capital requirements.

Isabelle Vaillant, Director of Regulation for the EBA in London, says this approach is required because of inconsistencies in the Fundamental review of the trading book (FRTB) – the year-old international standards on market risk capital – and because the industry has no experience with the new test.

Banks have claimed the profit and loss (P&L) attribution test is too sensitive and will be nearly impossible to pass without a painful series of revamps, according to Risk.net. A discussion paper from the EBA, expected later this year, will explore a variety of ways to achieve this outcome, including the fundamental question of what measures should be compared.

However, a deliberative approach from the EBA might leave European banks with no way to obtain modelling approval before the regime's 2020 start date, potentially forcing them to apply the sensitivities-based approach – a standardized formula that generates higher capital levels, Risk.net explains.

"We have to be pragmatic. We already have a backstop in the form of the SBA – that's life. We'll observe two or three years of practice and will then try to incorporate it into our standards," says Vaillant in an interview with Risk.net.

In general, SFIG members believe that current capital rules are overly punitive with regards to securitization, and liquidity rules do not provide for sufficient liquidity treatment for ABS and private label RMBS. Please see recent SFIG comments letters from August of 2016 and July of 2016. SFIG is currently engaged with members across all asset classes to drive constructive reform.

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