FedFin on: Market-Risk Capital Standards

2023-08-17T10:02:39-04:00August 16th, 2023|The Vault|

In this analysis, we turn to one of the costliest aspects of the proposed rewrite of U.S. regulatory-capital standards:  the market-risk framework.  This aspect of the proposal would significantly rewrite current U.S. market-risk rules to reflect the “fundamental review of the trading book” (FRTB) regime the Basel Committee crafted in 2018.  However, unlike the global rules, the U.S. approach would largely dispense with reliance on internal models in a manner generally consistent with the overall decision to eschew models; even where models are allowed for market risk, they are strictly constrained.  These standards thus would raise current market risk-based capital (MRBC) requirements by as much as seventy percent, with much of this falling on category I and II banks no longer allowed to use their current, largely models-based methodologies….

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