Facing pressure both from industry and national regulators, the Basel Committee has decided to reopen the final market-risk capital requirements standards it called the fundamental review of the trading book (FRTB) package.  Although technical in many respects, the proposed revisions would nonetheless reduce the capital impact of the FRTB for banks with trading exposures in relatively simple assets.  Banks using the internal-models approach (IMA) could also see trading-book capital drops based on changes to the standardized approach, but the new output floor may limit this in some circumstances.  If these changes reduce opposition in some nations to the FRTB, then a harmonized global approach to market-risk capital would emerge in ways that should reduce cross-border arbitrage and resulting risk.  However, the overall impact of the current capital framework – especially the leverage ratio – will still push banks to reduce trading books and/or revise asset composition.

The full report is available to retainer clients. To find out how you can sign up for the service, click here.