US Banks Sidestep FRTB: A Sign of Global Fragmentation?
A recent revision to trading-activity thresholds by the Federal Reserve is set to exempt eight US banks from the full application of the Fundamental Review of the Trading Book (FRTB). This move, while potentially easing the regulatory burden for these institutions, raises questions about the future of FRTB’s global implementation and the increasing divergence in regulatory approaches.
The Narrowing Scope of FRTB in the US
Currently, US lenders with trading assets and liabilities exceeding $1 billion, or representing 10% or more of total assets, are required to calculate market risk-weighted assets (RWAs) using Basel 2.5 standards. The proposed changes aim to refine these thresholds, effectively reducing the number of banks subject to the more stringent FRTB framework. This impacts institutions like Raymond James & Associates, Stifel Financial, and First Horizon Bank.
Global FRTB Implementation: A Patchwork Approach
The FRTB framework, designed to improve the measurement of market risk, has faced numerous delays and challenges globally. The European Union postponed its implementation, shifting attention to the US and UK. This latest development in the US adds another layer of complexity, highlighting a growing trend of regulatory divergence. As noted by Risk.net, the European Central Bank (EC) has stressed the importance of aligning FRTB start dates globally, but this appears increasingly unlikely.
Why the US is Taking a Different Path
The US clampdown on FRTB models, as reported by Risk.net, suggests a cautious approach to the framework’s complexity and potential impact on bank capital. Concerns about model risk and the cost of implementation may be driving the decision to narrow the scope of application. Canada is also exhibiting a reluctance to fully embrace internal FRTB models, further illustrating this trend.
The Potential Extinction of FRTB Models
Risk.net reports that FRTB models are “on the edge of extinction.” The combination of implementation delays, regulatory divergence, and the increasing cost of maintaining complex models is leading some institutions to question the value of investing in FRTB compliance. This could result in a reliance on simpler, standardized approaches to market risk calculation.
Impact on Market Risk Modelling
The revised thresholds will narrow the scope of the market risk framework, potentially leading to a less comprehensive assessment of risk exposures across the US banking system. This could have implications for financial stability, particularly during periods of market stress. Banks that are no longer required to employ FRTB may revert to less sophisticated modelling techniques.
What Does This Signify for the Future?
The US decision signals a potential shift away from a globally harmonized approach to market risk regulation. This fragmentation could create challenges for international banks operating across multiple jurisdictions and increase the complexity of cross-border supervision. The future of FRTB hinges on the actions of the US and UK, as the EU has already delayed its implementation.
FAQ
- What is FRTB? FRTB is a set of reforms designed to improve the measurement of market risk held by banks.
- Why are some US banks being exempt from FRTB? Revised trading-activity thresholds are reducing the number of banks required to comply with the framework.
- Is FRTB being implemented globally? Implementation is fragmented, with delays in the EU and diverging approaches in the US and Canada.
- What are the potential consequences of FRTB fragmentation? Increased complexity for international banks and challenges for cross-border supervision.
Explore further: For more in-depth analysis of FRTB and market risk regulation, visit Risk.net.
