FRTB


The Fundamental Review of the Trading Book, is a set of proposals by the Basel Committee on Banking Supervision for a new market risk-related capital requirement for banks.
This reform, often referred to as "Basel IV", is one of the initiatives taken to strengthen the financial system, noting that the previous proposals did not prevent the financial crisis of 2007–2008.
It was initially published in January 2016
and revised in January 2019.
The FRTB revisions address deficiencies relating to
the existing Standardised approach
and Internal models approach
and particularly revisit the following:
FRTB sets a "higher bar" for banks to use their own, internal models for calculating capital, as opposed to the standardised approach.
The Logic:
the standardised approach is directly implementable, but, at the same time, carries more capital;
the internal models approach, by contrast, carries less capital, but the modelling is more complex, requiring that expected shortfall is applied, together with add-ons for the "non-modellable risk factors" that lack sufficient data.
Given this complexity, for a desk to qualify for the internal models approach, its model must pass two tests:
a profit and loss attribution test
and a backtest.