The FRTB: Do not underestimate the standardised approach

Abstract

There is currently a lot of discussion in the industry about the internal
model-based approach to the FRTB; however, it is important that banks do not
underestimate the challenges of implementing the FRTB standardised method,
particularly as it will impact all institutions including those that adopt
the internal approach. Among the significant changes that are being
introduced by the FRTB is a stricter separation of the trading book and
banking book. Regardless of whether they currently use standardised or
internal models, banks will need to review their portfolios to determine if
existing classifications of instruments and desks as trading book or banking
book are still applicable or whether a revision of desk structure is
required. While doing all of the above, it is important that banks do not
lose sight of the wider context in which the FRTB requirements are being
introduced. The FRTB is just one element in a package of new capital adequacy
rules. The changes that are being made to the capital adequacy rules are so
fundamental and so numerous that, although they are part of Basel III, some
people are now referring to them as ‘Basel IV’.