Fundamentally fraught: the chaotic last weeks of the FRTB
Quick fixes should have no place in a sweeping three-year reform project
So, after more than three years of work on new trading book capital rules, this is how it ends: a confused, chaotic sprint to meet an arbitrary deadline; vital questions left unanswered; impacts unknown.
That's how the banks see it anyway. Of course, if you listen to banks, this is how every rule-making process ends – so the furore about the Fundamental review of the trading book (FRTB) might at first appear to be the usual case of a frustrated industry making a final, desperate roll of the dice. What's different this time is that some of the complaints are echoed by regulators who have been involved in the process.
A final round of changes to the FRTB was made when the Basel Committee on Banking Supervision belatedly decided to run a fourth quantitative impact study (QIS) in July. This, in itself, was evidence of the pressure regulators were under – it would have been more normal to consult on the changes, then to issue QIS instructions. But with the committee apparently under instructions to finish the rules this year, wholesale changes had to be made with no public consultation.
So, out went the asymmetric treatment of correlations – an element of the draft standardised approach that had produced a huge capital uplift relative to modelled numbers in the third QIS. In its place suddenly appeared an add-on for residual risk, in the form of a 1% charge on the notional of more exotic products. It had more or less the same effect as the mechanism it replaced – banks say it ended up accounting for almost half of the standardised charge. Where did the add-on come from? One regulator says: "There are people at the committee level that are very fearful of models. So they looked at this and said 'One percent of notional: why not? This is all the exotic stuff: what are they doing in this space anyway?' It was a quick and easy fix."
Based on the results of the fourth QIS, the impact of the add-on is expected to be scaled down – regulators say it should ultimately account for around 10% of the standardised capital total. Another quick fix.
But the FRTB was not supposed to be about quick fixes. It was an attempt to replace Basel 2.5 – an entirely necessary post-crisis repair job – with a coherent set of rules. Conceptually, a lot of it makes sense, and even banks would probably concede regulators are taking aim at the right targets, but there was a lot to do. And the banks are right to complain it has been rushed.
Only users who have a paid subscription or are part of a corporate subscription are able to print or copy content.
To access these options, along with all other subscription benefits, please contact info@risk.net or view our subscription options here: http://subscriptions.risk.net/subscribe
You are currently unable to print this content. Please contact info@risk.net to find out more.
You are currently unable to copy this content. Please contact info@risk.net to find out more.
Copyright Infopro Digital Limited. All rights reserved.
You may share this content using our article tools. Printing this content is for the sole use of the Authorised User (named subscriber), as outlined in our terms and conditions - https://www.infopro-insight.com/terms-conditions/insight-subscriptions/
If you would like to purchase additional rights please email info@risk.net
Copyright Infopro Digital Limited. All rights reserved.
You may share this content using our article tools. Copying this content is for the sole use of the Authorised User (named subscriber), as outlined in our terms and conditions - https://www.infopro-insight.com/terms-conditions/insight-subscriptions/
If you would like to purchase additional rights please email info@risk.net
More on Risk management
Growing regulatory focus fuels climate risk staffing fight
Widespread poaching as banks find repurposing existing quants may not provide the right expertise
Tackling credit risk in turbulent times
Survey reveals Apac CROs’ top credit risk priorities
US climate guidance stokes debate over defining material risks
Banks welcome flexibility, but it could lead to big divergence on climate risk management
Geopolitics is harsh terrain for FMIs
Idiosyncratic nature of disputes and flare-ups leaves exchange and infrastructure operators blending metrics with guesswork
FMIs get busy, as supervisors circle
Via new roles and controls, exchanges and clearers hope to “get ahead” of regulatory wave
On cyber, FMIs seek to avoid being weapons of mass disruption
Controls focus on basic cyber hygiene, but communicating the risk remains a challenge
The top 10 investment risks for 2024
New fears include mounting government debt, the rise of AI, a credit crunch and regulatory overkill
Will generative AI crack the code for bank tech teams?
Banks could roll out tools to help translate old – or write new – code within months