Time to prepare strategically for the FRTB and other ‘Basel IV’ calculations

March 4, 2016 –

Nicola Hortin - Head of Regulatory Analysis Team, EMEA, AxiomSL

Nicola Hortin, Head of the EMEA Regulatory Analysis Team at AxiomSL, gave the following interview to the Centre for Financial Professionals ahead of the Fundamental Review of the Trading Book (FRTB) conference which was hosted in London in April 2016.

  1. There is a lot of discussion at the moment about the FRTB and Standardized Approach for Measuring Counterparty Credit Risk Exposures (SA-CCR). Can you put these requirements into a wider context? Are there other changes to the Basel capital requirements that banks need to be aware of?The FRTB and SA-CCR will completely change the way banks calculate their market risk and credit risk capital requirements, respectively. Banks have a lot of work to do in order to prepare for the changes. However, it is important to bear in mind that the FRTB and SA-CCR are just two elements in a much larger package of new Basel capital adequacy requirements.

In addition to the FRTB and SA-CCR, changes are being made to the way banks calculate the capital needed to cover their exposures to central counterparties (CCPs), operational risk and credit risk due to securitizations. There will also be a new framework for measuring and controlling large exposures, and changes to the risk weights in the standardized approach to credit risk capital calculations. In fact, there are plans to change almost all of the existing Basel calculations. The changes are so numerous and so significant that, although they are part of Basel lll, some people are now referring to them as ‘Basel IV’.

  1. What challenges are presented by the implementation of so many new requirements? What should banks do to prepare?

The new Basel capital requirements will be phased in at different points over the coming years. In order to keep up, banks will need to be able to juggle multiple implementation deadlines and move smoothly from their incumbent calculations to the new versions.

The best way for banks to do this is by using a regulatory calculation tool that allows them to run the new Basel calculations in parallel with their current calculations. This will give them a clear and accurate understanding of how their capital requirements will change when the new rules come into force, because the results will be based on production data. This approach will also give banks time to ensure they are comfortable with the way they have implemented the new calculations within their regulatory compliance infrastructure before the calculations come into force. When the relevant implementation deadlines arrive, the banks will then be able to confidently switch from the old Basel calculations to the new Basel calculations.

Banks that do their Basel impact analysis work manually are likely to struggle with the many deadlines ahead. When an implementation deadline approaches, these banks will be under pressure to quickly reconfigure their regulatory calculation tool based on the changes they have worked out on paper. Their impact analysis work will also be less reliable because it will not be based on production data.

  1. Is there anything else banks can do to reduce the cost and complexity of implementing all of these new Basel capital calculations?

The most efficient way for banks to tackle the new Basel capital rules is by using a single platform to manage all of the calculations.

There is a significant overlap between the data that will be needed to run the different calculations. For example, the same product data will be required in all cases. By using a single platform for all of the calculations, banks will only need to load this data once and will then be able to use it for all of the different requirements. In addition to being more efficient, this approach will ensure consistency between the data used to run the different calculations.

As well as having overlapping data requirements, many of the new calculations are interdependent. For example, the outputs from SA-CCR will need to be fed into the large exposure and credit valuation adjustment (CVA) calculations. By doing everything on the same platform, banks will be more easily able to feed the outputs of individual calculations into other related calculations, without the need for manual processes or integration layers.

Banks face a busy few years implementing all of the new Basel capital calculations, including the FRTB. However, by thinking strategically about the entire suite of reforms now and by using a strategic regulatory platform, they can adapt smoothly and efficiently to the new regulatory regime.

For more information on AxiomSL’s solutions, please contact:

emea@axiomsl.com