An impact assessment of the Fundamental Review of the Trading Book (FRTB) – from the Business and Industry standpoint

Paul, Arkajeet (2015) An impact assessment of the Fundamental Review of the Trading Book (FRTB) – from the Business and Industry standpoint. [Dissertation (University of Nottingham only)]

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Abstract

In May 2012, The Basel Committee on Banking Supervision (BCBS) published a consultative paper (CP1) (BCBS, 2012) referred to as the Fundamental Review of the Trading Book (FRTB). The revisions to the capital framework, as suggested in the consultative paper, aim to achieve a more resilient banking sector by strengthening capital standards for market risk management. They form part of the Basel Committee’s wider program in restructuring regulatory standards for banks in response to the 2008 financial crisis. The FRTB is a rejoinder to the inadequacies of Trading Book rules that remained exposed since the financial crisis, and foresights the upcoming situation of capital principles for trading related risks (Finger, 2012). The changes set out in the consultative paper are important and cover multiple aspects of the Trading Book such as the definition of the Trading Book, the market risk and liquidity risk measurement as well as the capitalisation and supervision of the internal risk models. There were further revisions on these rules published by the BCBS on a second consultative paper (CP2) (BCBS, 2013) in October 2013 followed by a third consultative paper (CP3) (BCBS, 2014) in December 2014, covering the outstanding issues related to the FRTB capital requirements. Since the inception of the publications and till date, the Basel Committee kept revising the propositions in accordance to a detailed study on the continual Industry responses and recommendations on the FRTB reforms. Till date, the BCBS is working on attending some of the outstanding issues on FRTB by accumulating the Industry’s responses and by encouraging a wide spectrum of banks to participate in a series of Quantitative Impact Study (QIS) and Hypothetical Portfolio Exercise (HPE). The QIS and HPE initiatives are aimed to test the feasibility and tolerance of the latest market risk capital rules that would ultimately help in the FRTB framework finalisation. Whilst the Basel Committee is still consulting the Industry on finalising the suggested regulations, much of the decided rules are anticipated to get implanted onto the framework finalisation, which might come in effect by 2017. However, the bulk-framework preparation and design is required to be finalised by first-half of 2016 to safeguard sufficient testing time (Bennett and Masschelein, 2015).

The FRTB does and will have a wide-ranging impact on the way that the firms define its future trading as well as strategize its risk management. Given the scope and the level of business-impact that the FRTB has in the current period or will have in the future, analysing the proposed changes to the Trading Book regime and studying the FRTB’s business impacts from the Industry’s standpoint is crucial. This is in fact the main objective of this research paper. This research project is offered by Credit Suisse, London with an aim to study the FRTB’s impacts on the businesses from the Industry’s point of view. This research paper aims to benefit the bank in understanding the various impacts and amendments of the FRTB regulation from its inception to the present situation as well as the Industry’s critical outlook and recommendations on the rule-reforms.

Item Type: Dissertation (University of Nottingham only)
Depositing User: Paul, Arkajeet
Date Deposited: 11 Jun 2021 13:06
Last Modified: 11 Jun 2021 13:15
URI: http://eprints.nottingham.ac.uk/id/eprint/29927

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