EBA launched a consultation on the draft regulatory technical standards on the list of countries with an advanced economy for calculating the equity risk under the alternative standardized approach (FRTB-SA). EBA proposes a list of advanced economies corresponding to the list provided in the Fundamental Review of the Trading Book (FRTB). In this context, EBA seeks feedback on whether the list is comprehensive, particularly whether there are additional EU countries in which the equity risk can be considered similar to the countries already included in the FRTB list of advanced economies. Furthermore, EBA seeks stakeholders’ views on sources of data and criteria that could be designed to identify advanced economies and emerging markets for the purpose of FRTB-SA equity risk own funds requirements. The consultation runs until July 02, 2021.
These technical standards are part of the phase 3 deliverables of EBA roadmap for the new market and counterparty credit risk approaches. The Capital Requirements Regulation (CRR), as amended by CRR2, implements in EU legislation, the revised framework to compute own funds requirements for market risk. One component of these requirements is the sensitivities-based method under the FRTB-SA. For institutions to be able to calculate own funds requirements under the sensitivities-based method, Article 325ap(3) of the CRR requests EBA to specify the economies that should attract lower risk-weights for equity risk under the FRTB-SA (advanced economies); all other economies would be subject to higher risk-weights.
FRTB provides a list of countries that are considered to be “advanced” for the purpose of FRTB-SA. As specified in the consultation paper, the advanced economies are Canada, the United States, Mexico, the euro area, the non-euro area western European countries (the United Kingdom, Norway, Sweden, Denmark, and Switzerland), Japan, Oceania (Australia and New Zealand), Singapore, and Hong Kong SAR. The FRTB list was published without the underlying criteria used to get such list being provided. In addition, this list has not been reviewed since the first version of the list published on January 14, 2016. EBA considers that the list would benefit from a review before the FRTB comes into effect. EBA would expect additional EU or European Economic Area countries to qualify as advanced economies for the purpose of the computation of equity risk own funds requirements under the FRTB-SA.
Institutions using the alternative standardized approach to determine own funds requirements for market risk are required to compute the equity risk stemming from their trading book positions in accordance with a prescribed set of risk factors and the corresponding risk-weights. To determine the appropriate risk-weight, institutions are expected to identify whether a risk factor refers to an advanced economy or an emerging market. Risk factors mapped to the advanced economy bucket benefit from a lower risk-weight compared to those mapped to the emerging market bucket.
Comment Due Date: July 02, 2021
Keywords: Europe, EU, Banking, CRR, CRR2, Basel, Market Risk, FRTB, FRTB SA, Regulatory Technical Standards, Standardized Approach, Regulatory Capital, EBA
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