The impact of the Fundamental Review of the Trading Book: Evaluation on a stylized portfolio

• Autor(a) principal: Carvalho, Paulo V.
• Data de Publicação: 2024
• Outros Autores: Pinheiro, C., Rodrigues, M. S.
• Tipo de documento: Artigo
• Idioma: eng
• Título da fonte: Repositório Científico de Acesso Aberto de Portugal (Repositórios Cientìficos)
• Texto Completo: http://hdl.handle.net/10071/31293
• topic: Capital requirement; Basel Committee on Banking Supervision(BCBS); Trading book; Fundamental Review of the Trading Book(FRTB); Market risk

We investigate the impact of the Basel Fundamental Review of the Trading Book (FRTB) on banks’ market risk capital requirements under the Internal Model Approach. To do this, we take a stylized portfolio sensitive to the risk factors affected by FRTB, representative of a typical trading book. Our assessment spans the period 2007-2019. We find that FRTB will entail sizeable increases in regulatory capital intended to absorb market shocks. These increases hail not only from the change in the risk measure and taking longer liquidity horizons, the latter with greater impact on portfolios more focussed on bonds, but also from the strong limitation of portfolio diversification benefits. Our study should be of interest to bank supervisors and regulators, risk managers, and other decision-makers within the banking industry.