Impact of the FRTB on internal risk management

The “Fundamental Review of the Trading Book” (FRTB)1 introduces significant changes to the regulatory capital requirements for market risk. There are also implications for the internal risk management, Pillar 2 of the regulatory requirements. It is to be expected that essential elements will have to be used in Pillar 2 if an internal model approach (IMA) is used for Pillar 1. Accordingly, these elements will have to be adjusted. The new standardised approach (SA-TB) replicates a simple portfolio model and thus offers the opportunity to increase the consistency between Pillar 1 and Pillar 2 models for banks, including those without an internal Pillar 1 model.

This whitepaper elaborates on the adjustments to existing methods and processes which are necessary, or at least recommended, depending on the bank’s specific situation.