European banks are taking a relaxed approach to preparations for the Fundamental Review of the Trading Book (FRTB) thanks to the extension of the implementation deadline, according to a central bank and a market participant.
“There is less rush with the FRTB implementation process as outlined by the revised Capital Reporting Requirements (CRR) with a two-step approach. In the first step banks have only to report capital numbers, own fund requirements will be charged by the new rules in a second step. Thus banks have time to implement and prepare for the 'real case,’” said a Deutsche Bundesbank spokesperson in an email.
“The most challenging changes of FRTB will be relevant only for those banks, which have more complex and material trading books. In Basel and the EU proportionality was considered and as a result, less complex banks can still use simplified approaches,” said the spokesperson.
But banks cannot become complacent as the reporting rules could also require a model approval process, according to Andrew Aziz, global head, financial risk analytics at IHS Markit.
“If the reporting requirement had no teeth then that is essentially two years of an extension and perhaps you could consider that a lull. I think it would be foolish to do so, but you could. On the other hand if there is teeth in it – and the regulators have suggested that banks will have to go through the internal models’ approval process for the reporting requirement as well – means you really still have to be up and running despite this additional phase for Europe,” says Aziz.
FRTB was developed by the Basel Committee on Banking Supervision (BCBS) as part of the Basel III rules. It is a set of capital requirements intended to be applied to banks’ wholesale trading activities to create a more resilient market.
Due to changes in the implementation of FRTB and their conflict with the EU’s own capital requirements, European regulators agreed “that it would not be appropriate to implement the FRTB rules as initially proposed by the Commission in the banking package because it would oblige institutions to meet requirements subject to change in the short term,” the EU Commission said in a press release.
Instead, they adopted a reporting requirement, which would come into force “once the elements reviewed at international level are introduced via a number of level 2 measures (delegated act for the standardised approach and RTS developed by EBA for the internal model approach),” the press release stated.
Europe’s revised capital requirement rules (CRR II) were published in the Official European Journal on June 7.
On June 27, the European Banking Authority (EBA) published eleven consultation papers on technical standards for the new Internal Model Approach (IMA) under the FRTB standards, along with a data collection exercise on non-modellable risk factors (NMRF). The consultations run until October 4.
Delays in banks’ FRTB implementation have come from an uneasiness surrounding the uncertainty of individual jurisdiction timelines, particularly in the UK, according to Aziz.
“Most [regulators] are working towards the 2022 timelines that Basel has proposed, the exception is Europe and I think it is still a bit unclear in the UK around reporting requirements. Europe has announced that they will have a reporting requirement first beginning in mid-2023 before the capital requirements go live. The UK has not committed to this,” says Aziz.
“Banks are reluctant to make a big investment which is in part due to the uncertainty of the finalization of the guidelines, and the timeline of the guidelines,” he says.
Earlier this month, Francois Villeroy de Galhau, governor of the Banque de France voiced concerns around international adoption of the latest Basel III framework, particular in the US, Reuters reported.
“We should resist the temptation of short memory and we should resist the temptation to forget,” said Villeroy at an EBA event.
Also causing concern is whether regulators will be able to streamline model approval processes, says Aziz.
“I have heard that in terms of the approval process there are hopes to use the same processes that they used for Basel 2.5, the PLA requirement aside because that is different, but a similar approach there so hopefully that expedites things. But I’ve also heard at the same time that the approval process might take two years. I’ve heard that more from a European perspective,” he says.
But this is yet to be established by regulators.
“The ECB and the national competent authorities, including the ACPR, maintain an ongoing communication with the banks under their supervision to set a clear calendar for Internal Models Validations for the reporting phase. Supervisors are exploring different approaches on how this reporting phase could be used in the most efficient manner,” said an ACPR spokesperson in an email.