The Fundamental Review of the Trading Book (FRTB), is a set of proposals by the

Basel Committee on Banking Supervision The Basel Committee on Banking Supervision (BCBS) is a committee of banking supervisory authorities that was established by the central bank governors of the Group of Ten (G10) countries in 1974. The committee expanded its membership in 2009 a ...

for a new

market risk Market risk is the risk of losses in positions arising from movements in market variables like prices and volatility. There is no unique classification as each classification may refer to different aspects of market risk. Nevertheless, the mos ...

-related

capital requirement A capital requirement (also known as regulatory capital, capital adequacy or capital base) is the amount of capital a bank or other financial institution has to have as required by its financial regulator. This is usually expressed as a capital ad ...

for banks.

Background

The reform, which is part of

Basel III Basel III is the third Basel Accord, a framework that sets international standards for bank capital adequacy, stress testing, and liquidity requirements. Augmenting and superseding parts of the Basel II standards, it was developed in response t ...

, is one of the initiatives taken to strengthen the financial system, noting that the previous proposals (

Basel II Basel II is the second of the Basel Accords, which are recommendations on banking laws and regulations issued by the Basel Committee on Banking Supervision. It is now extended and partially superseded by Basel III. The Basel II Accord was publi ...

) did not prevent the

financial crisis of 2007–2008 Finance is the study and discipline of money, currency and capital assets. It is related to, but not synonymous with economics, the study of production, distribution, and consumption of money, assets, goods and services (the discipline of fi ...

. 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.

Key features

The FRTB revisions address deficiencies relating to the existing '' Standardised approach''''International Convergence of Capital Measurement and Capital Standards''
Basel Committee on Banking Supervision, 2006 and '' Internal models approach'' and particularly revisit the following: *The boundary between 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. Background The reform, which is part of Basel III, is one of t ...

" and the " banking book": i.e. assets intended for active trading; as opposed to assets expected to be held to maturity, usually customer loans, and deposits from retail and corporate customers Banking book
bankpedia.org (important since the " st majority of losses were from trading books during the 2008 crisis"''Minimum Capital Requirements for Market-Risk''
International Monetary Fund, 2016) *The use of expected shortfall instead of

value at risk Value at risk (VaR) is a measure of the risk of loss for investments. It estimates how much a set of investments might lose (with a given probability), given normal market conditions, in a set time period such as a day. VaR is typically used by ...

as a measure of risk under stress; thus ensuring that banks capture tail risk events *The risk of market illiquidity

Implementation

FRTB sets a "higher bar" for banks to use their own, internal models for calculating capital, as opposed to the standardised approach.''Fundamental Review of the Trading Book (FRTB)''
risk.net The rationale is that 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, requiring that expected shortfall is applied, together with add-ons for the "non-modellable risk factors" that lack sufficient data. Given this complexity, for a

desk A desk or bureau is a piece of furniture with a flat table-style work surface used in a school, office, home or the like for academic, professional or domestic activities such as reading, writing, or using equipment such as a computer. Desks oft ...

to qualify for the internal models approach, its model must pass two tests: a profit and loss attribution test and a

backtest Backtesting is a term used in modeling to refer to testing a predictive model on historical data. Backtesting is a type of retrodiction, and a special type of cross-validation applied to previous time period(s). Financial analysis In a tradin ...

References

Bibliography

*Ioannis Akkizidis, Lampros Kalyvas (2018). ''Basel III Modelling: Implementation, Impact and Implications''. Palgrave Macmillan. *Sanjay Sharma, John Beckwith (2018). ''The FRTB: Concepts, Implications and Implementation''. Risk Books. {{ISBN, 9781782723240 Bank regulation Market risk Capital requirement