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    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.


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    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

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