Featured Product

    EBA Sets Out Treatment of Certain Banking Book Positions Under FRTB

    December 03, 2020

    EBA published the final draft regulatory technical standards for calculation of own funds requirements for market risk, under the standardized and internal model approaches of the Fundamental Review of the Trading Book (FRTB) framework. These own funds requirements are for the non-trading book, or banking book, positions that are subject to foreign-exchange risk or commodity risk. The standards aim to establish common requirements for the valuation of foreign-exchange and commodity non-trading book positions and for the specifications of the calculation of hypothetical and actual changes for the backtesting and the profit and loss attribution test for positions in the non-trading book. As per the draft, these standards will enter into force on the twentieth day after their publication in the Official Journal of the European Union.

    The final draft standards specify the value that institutions are to use when computing the own funds requirements for market risk for banking book positions. In this respect, the standards require institutions to use the last available accounting value or the last available fair value for positions attracting foreign-exchange risk. In addition, institutions are not required to perform a daily re-valuation of banking book positions attracting foreign-exchange risk. However, they must reflect the changes in the position’s foreign-exchange component on a monthly basis under the standardized approach and on a daily basis under the internal model approach. For positions attracting commodity risk, institutions are required to use the fair value as a basis of their calculations.

    Additionally, the final draft standards lay down a prudential treatment for the calculation of the own funds requirements for market risk of non-monetary items held at historical cost that may be impaired due to changes in the foreign-exchange rate. In this respect, the standards identify a specific methodology that institutions should use when capitalizing the foreign-exchange risk stemming from those items under the standardized approach. Furthermore, the standards require institutions to model directly the risk of impairment due to changes in the relevant exchange rate in the case of an internal model approach being used. Finally, the standards specify an ad-hoc treatment with respect to the calculation of the actual and hypothetical changes associated to banking book positions for the purpose of the back-testing and the profit and loss attribution requirements. This is to address the issue of jumps in the value of banking book positions that may lead to over-shootings in the back-testing that are not due to changes of market risk factors.

    The draft regulatory technical standards have been finalized after considering the comments received in response to the consultation paper published in January 2020. With the exception of the treatment set out for capitalizing non-monetary items at historical cost, the comments were broadly supportive of the approach set out by EBA. However, a number of technical suggestions were also put forward, which were considered during the finalization and included where relevant. EBA is mandated to develop these standards in accordance with Article 325(9) of the revised Capital Requirements Regulation (CRR2). As per CRR2, institutions are required to calculate own funds requirements for market risk for positions held in the trading book and for positions held in the banking book bearing foreign-exchange or commodity risk.

     

    Related Links

    Keywords: Europe, EU, Banking, FRTB, Own Funds Requirement, CRR2, Market Risk, Basel, Internal Controls, Standardized Approach, Regulatory Technical Standards, Foreign Exchange Risk, Commodity Risk, Banking Book, Regulatory Capital, EBA

    Featured Experts
    Related Articles
    News

    OSFI Issues Results of Pilot on Climate Risk Scenario Analysis

    The Office of the Superintendent of Financial Institutions (OSFI) published an update on the discussion paper that intended to engage federally regulated financial institutions and other interested stakeholders in a dialog with OSFI, to proactively enhance and align assurance expectations over key regulatory returns.

    January 20, 2022 WebPage Regulatory News
    News

    EC Issues Regulation on Adjustments to K-Factor Coefficients Under IFR

    The European Commission (EC) published a report summarizing responses to the targeted consultation on the supervisory convergence and the single rulebook in the European Union (EU).

    January 20, 2022 WebPage Regulatory News
    News

    ECB Issues Opinions on Green Bonds Standard and CRR Proposals

    The European Central Bank (ECB) published its opinion on a proposal for a regulation on European green bonds, following a request from the European Parliament.

    January 19, 2022 WebPage Regulatory News
    News

    ESRB Explores Policy Response to Risks Arising from Digitalization

    The Advisory Scientific Committee (ASC) of the European Systemic Risk Board (ESRB) published a report that explores the expected impact of digitalization on provision of financial and banking services, and proposes policy measures to address the risks stemming from digitalization.

    January 18, 2022 WebPage Regulatory News
    News

    HKMA Consults on FIRO Code, Revises Policy on Foreign Exchange Risk

    The Hong Kong Monetary Authority (HKMA) is consulting on the draft Financial Institutions (Resolution) Ordinance (Cap. 628), or FIRO, Code of Practice chapter on liquidity and funding in resolution, until March 14, 2022.

    January 18, 2022 WebPage Regulatory News
    News

    FI Publishes Multiple Regulatory and Reporting Updates

    The Swedish Financial Supervisory Authority (FI) announced that the capital adequacy reporting as at December 31, 2021 must be done by February 11, 2022.

    January 17, 2022 WebPage Regulatory News
    News

    EU Authorities Address COVID-19 Reporting, MCD, and PSD2 Issues

    The European Banking Authority (EBA) announced that the guidelines on the reporting and disclosure of exposures subject to measures COVID-relief measures shall continue to apply until further notice.

    January 17, 2022 WebPage Regulatory News
    News

    BSP Tackles Aspects of Lending and Islamic, Open & Sustainable Finance

    The Central Bank of the Philippines (BSP) issued communications covering developments related to online lending platforms, open finance framework and roadmap, and on the expected regulations in the area sustainable finance.

    January 16, 2022 WebPage Regulatory News
    News

    US Agencies Issue Regulatory Updates, FDIC Launches Tech Sprint

    The Board of Governors of the Federal Reserve System (FED) published the final rule that amends Regulation I to reduce the quarterly reporting burden for member banks by automating the application process for adjusting their subscriptions to the Federal Reserve Bank capital stock, except in the context of mergers.

    January 13, 2022 WebPage Regulatory News
    News

    EBA Issues Guide on Bank Resolvability, Consults on Transferability

    The European Banking Authority (EBA) published its assessment of risks through the quarterly Risk Dashboard and the results of the Autumn edition of the Risk Assessment Questionnaire (RAQ).

    January 13, 2022 WebPage Regulatory News
    RESULTS 1 - 10 OF 7903