In January the Basel Committee released final revisions to the upcoming Fundamental Review of the Trading Book (FRTB), including a number of modifications to make the regulation more palatable to industry players and a confirmed deadline of January 2022 for initial implementation. Despite its modest revisions, the transformative framework will enforce one of the biggest regulatory trading reviews of the past two decades – and with time running out to effect the required changes, some banks could be at more of a disadvantage than others.
The final incarnation from the Basel Committee includes a number of key changes to the original plan: such as the introduction of a simplified standardised approach for banks with small or non-complex trading portfolios; a clarification of the scope of exposures that are subject to market risk capital requirements; revised treatment of foreign exchange risk, index instruments and options; an updated P&L attribution test; and a relaxation of the requirements for identifying risk factors for internal modelling and non-modellable risk factors.
Yet while these changes should relieve some of the original burden on banks, and could reduce compliance costs – currently estimated at around $5bn, the revised framework is still expected to result in a weighted average increase of about 22% in total market risk capital requirements. While this is a positive reduction from the initial estimates of 40% from the original proposal, it still likely to impose a heavy burden on institutions already chasing to update their systems in time to meet the new requirements.
“If you’re a regional bank or a domestic bank – or even if you’re an international bank that is heavily centred on liquid assets – you’re likely to experience challenges in gathering the required data. In areas where banks don’t trade regularly, they are unlikely to have visibility, therefore they will have to collect an unprecedented quantity of new data in order to run their processes,” explains Kaylash Patel, Head of Enterprise Analytics at Refinitiv. “And banks don’t want to be a data aggregators. They want to be able to focus on what they’re good at, on the businesses that will provide a return on their capital.”
One concerning consequence of this could be the unexpected impact on the competitive landscape, as smaller banks struggle to keep up with their larger peers.
“For a regional bank, they might be very liquid domestically, but they often also provide an international service. If they’re not able to get their processes correct to meet FRTB requirements without attracting punitive capital measures, they could come under real threat from multinationals who are coming at this from a stronger position in terms of enterprise data,” warns Patel.
If smaller banks are not able to get their trade observation data together for internationally traded markets, then they may not to be able to offer that service to their customers. This could in theory lead to a disadvantage compared to multinational banks. There is, therefore, a genuine and identifiable commercial threat to regional banks of not having this process in place early.