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Forming FRTB action plans: Tactical vs. Transformational

Forming FRTB action plans: Tactical vs. Transformational

The formal phase of consultations between banks and regulators on Fundamental Review of Trading Book (FRTB) has ended, and the biggest change to market risk capital requirements in over a decade has been finalized. Now banks are in a race against the regulatory deadline, and must choose the most efficient path to overhaul their risk management infrastructure and adapt their business strategies. Over 100 banks worldwide were surveyed and interviewed by Chartis; many are uncertain that current efforts to meet these challenges are enough. 35% of banks surveyed believe that FRTB will have a high transformational impact on operations and will significantly increase regulatory capital. 90% of these firms expect to further increase resources in 2017. Yet over 50% of the respondents surveyed do not know if their bank will meet the January 2019 deadline.

The Fundamental Review of Trading Book (FRTB) defines new minimum capital requirements and behaviors for market risk management. The controversial reforms, released by the Bank for International Settlements (BIS), were finalized in January of this year.

FRTB has faced heavy resistance from the banking industry, which had repeatedly confronted regulators with results from Quantitative Impact Studies that showed the severity of higher capital requirements on their trading books. In response, regulators adjusted calculations in the final rules of FRTB to partially lighten the capital burden. Uncertainty remains on how banks interpret these rules, which continues to attract lobbying from the banking industry.

There is a consensus that adhering to the new methodologies will require a costly and time-consuming overhaul of the risk systems at many banks, however, there is not much time for banks to implement.

The FRTB reforms impact every bank with a trading book, which according to the new definition is virtually every bank.

Click here to access and download Chartis’s 2016 survey (PDF, opens in new window)


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