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Fundamental Review of the Trading Book
The Fundamental Review of the Trading Book (FRTB), is a set of proposals by the Basel Committee on Banking Supervision for a new market risk-related capital requirement for banks.
The reform, which is part of Basel III, is one of the initiatives taken to strengthen the financial system, noting that the previous proposals (Basel II) did not prevent the 2008 financial crisis. It was first published as a Consultative Document in October 2013. Following feedback received on the consultative document, an initial proposal was published in January 2016, which was revised in January 2019.
The FRTB revisions address deficiencies relating to the existing Standardised approach and Internal models approach and particularly revisit the following:
FRTB additionally sets a "higher bar" for banks to use their own, internal models for calculating capital, as opposed to the standardised approach. Here, for a desk to qualify for the internal models approach, its model must pass two tests: a profit and loss attribution test and a backtest.
As for other Basel frameworks, the Standardised Approach is directly implementable, but, at the same time, carries more capital; whereas the Internal Models approach, by contrast, carries less capital, but the modelling is more complex. More specifically, the calculations incorporate the above outlined enhancements, as follows.
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Fundamental Review of the Trading Book
The Fundamental Review of the Trading Book (FRTB), is a set of proposals by the Basel Committee on Banking Supervision for a new market risk-related capital requirement for banks.
The reform, which is part of Basel III, is one of the initiatives taken to strengthen the financial system, noting that the previous proposals (Basel II) did not prevent the 2008 financial crisis. It was first published as a Consultative Document in October 2013. Following feedback received on the consultative document, an initial proposal was published in January 2016, which was revised in January 2019.
The FRTB revisions address deficiencies relating to the existing Standardised approach and Internal models approach and particularly revisit the following:
FRTB additionally sets a "higher bar" for banks to use their own, internal models for calculating capital, as opposed to the standardised approach. Here, for a desk to qualify for the internal models approach, its model must pass two tests: a profit and loss attribution test and a backtest.
As for other Basel frameworks, the Standardised Approach is directly implementable, but, at the same time, carries more capital; whereas the Internal Models approach, by contrast, carries less capital, but the modelling is more complex. More specifically, the calculations incorporate the above outlined enhancements, as follows.