Title: An assessment of the Fundamental Review of the Trading Book: the capital requirement impact on a stylised financial portfolio
Authors: Chiara Pederzoli; Costanza Torricelli
Addresses: CEFIN, University of Milano Bicocca, Italy ' CEFIN and CeRP, University of Modena and Reggio Emilia, Italy
Abstract: This paper assesses the impact on capital requirements of the Fundamental Review of the Trading Book (FRTB) based on a stylised financial portfolio sensible to the risk factors affected by the review. Our results show the order of magnitude of the increase across the two regulations and the two possible approaches: the standard approach and the internal model approach. We further disentangle the components of the expected increase implied by the FRTB. The most interesting result emerges for the internal model approach, whereby the increase in the capital charge is attributable not only to the change in the risk measure and the inclusion of longer liquidity horizons, but most importantly to the dampening of the diversification benefit.
Keywords: Fundamental Review of the Trading Book; FRTB; capital requirements; trading portfolio; value-at-risk; VaR; stressed VaR; expected shortfall; liquidity risk; bank regulation; Basel Committee on Banking Supervision; BCBS.
International Journal of Banking, Accounting and Finance, 2021 Vol.12 No.4, pp.389 - 403
Received: 23 Oct 2019
Accepted: 28 Oct 2020
Published online: 29 Oct 2021 *