Banks unravel data conundrum as FRTB implementations stall

The Fundamental Review of the Trading Book (FRTB) continues to present significant implementation challenges for banks on their path to compliance.

Approval for the internal model approach (IMA) depends on passing backtesting requirements and the profit-and-loss attribution test. If banks are unable to pass these tests, they must use the standardised approach (SA), which usually results in higher capital requirements. However, the tests are difficult to pass and, even when desks do qualify for the IMA, some risk factors may be deemed non-modellable according to the risk factor eligibility test, which results in capital add-ons. Banks need to source sufficient transaction data to prove that risk factors can be modelled adequately.

This rapid read survey report, commissioned by Refinitiv, details how much progress banks have made in implementing FRTB and highlights the major challenges they face in gaining data insight, both for the SA and the IMA. The question of whether the capital savings from the IMA justify the significant investment in data and infrastructure presents a conundrum for firms, since they won’t know until they do.