Basel IV Market risk

Following the 'Basel 2.5' reform in July 2009, the Basel Committee on Banking Supervision recognised a number of structural flaws in the market risk framework that remained unaddressed. Therefore, the Fundamental Review of the Trading Book (FRTB) was conducted, which resulted in a revised standard for market risk capital requirements in January 2016. Key revisions were: (1) a revised banking book vs trading book boundary, (2) a revised internal models approach (IMA) to focus on tail risk, (3) desk-level IMA approval process with P&L attribution analysis requirements and (4) a revised standardised approach (SA) to make it more risk-sensitive. The purpose of the revisions is to deliver credible capital outcomes and to promote consistent implementation of the standards across jurisdictions.

Implementation / enforcement 01/2011 - 12/2018

Regarding the implementation it is expected that the proposed amendments will start entering into force in 2019.

The implications of the revisions are significant. The results of the quantitative impact study show that the revised framework will increase the total market risk capital requirement by 40% on a weighted average basis.
In addition to increased capital requirements, compliance with the revised framework may entail significant changes to the business model, governance and technology, which would require considerable efforts and investments.
Sector consolidation may be an option to cope with the increasing costs of compliance for trading desks. On the one hand, banks may question the viability of certain trading desks, thereby discontinuing activities, but on the other, they may increase their trading activities to obtain the economies of scale in order to manage the increasing costs.

Further information:
Basel standards on minimum capital requirements for market risk
Basel Fundamental review of the trading book – interim impact analysis
EU proposed adaptation (part of CRR2


Lennart Cattel Partner
Categories: Liquidity Capital and Risk