By Jay Hibbin, regional sales director of financial services EMEA at CenturyLink
As the name would suggest, the Fundamental Review of the
Trading Book (FRTB), is set to radically change market risk
management practices within the banking ecosystem. At its core,
it will overhaul the way in which banks calculate the risk
associated with financial instruments it holds on its trading
book(s), with particular importance for institutions that want
to use their own models to calculate capital charges to cover
their own exposure to risk.
At a time when banks are so capitally constrained, and with
focus on CET1 ratio as the core metric of a banks strength,
financial institutions are even more incentivised to use their
own internal models to calculate risk. As opposed to a
standardised model that is set out by the regulator, which
could require a hefty increase in the amount of capital to be
held against the risk, internal models allow the bank to fine
tune their risk profiles. This essentially means that financial
organisations using internal models can hold a more appropriate
level of capital for the risk that they hold.
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