Overview and Impact

Sanjay Sharma and John Beckwith

“You cannot carry out fundamental change without a certain amount of madness” – Thomas Isidore Noël Sankara

In January 2016, the Basel Committee on Banking Supervision (BCBS) released revised minimum capital requirements for market risk following their eight-year-long Fundamental Review of the Trading Book (FRTB). This framework represents an overarching view of how risks from banks’ trading activities and portfolios should be assessed and quantified through a credible and intuitive relationship with capital requirements. Principal components of the new guidelines include: a clear and impermeable boundary between banking and trading books; replacement of value-at-risk (VaR) by expected shortfall (ES) as a risk measure; a revised sensitivity-based standardised approach (SA); and a revised ES-based internal models approach (IMA) with differentiated liquidity horizons. The principal objectives of BCBS for FRTB are to achieve consistency across jurisdictions, for its standardised approach to serve as a credible fallback and a floor for the internal models approach, and to address existing weaknesses in the internal models approach – with the overarching motivation of not