APAC Banks Still Unsure on FRTB Compliance: Survey
Posted by Colin Lambert. Last updated: May 29, 2023
A survey of 24 Asia-Pacific based financial institutions finds the majority believe the fundamental review of the trading book (FRTB) rules under Basel III will increase capital requirements significantly, regardless of risk calculation model used, and that there remains uncertainty over the implementation timeline in many jurisdictions.
The survey, conducted by Murex, spoke to institutions headquartered in Australia, Hong Kong, India, Indonesia, Japan, Mainland China, Malaysia, Singapore, South Korea, Taiwan and Thailand. They represent, the firm says, diverse profiles, from local firms to domestic systemically important banks and global systemically important banks.
The study finds, however, that half of these banks plan to pursue the more risk-sensitive, sophisticated model of compliance—the value at risk-based internal model approach, or IMA. It is, according to Murex’ risk management solutions manager, Tim Clarsen, “surprising” that such a high proportion of banks are looking at FRTB as an opportunity to move to the internal model approach.
Clarsen adds that the survey found these banks face “a kaleidoscope” of contextual specificities, including variations in requirements and remaining uncertainty around adoption and implementation timelines of the standard. Sixty-three percent of respondents expect a 1.5 to three-fold capital increase when moving to FRTB. This applies to banks using either the SA or IMA method. “These banks think is it worthwhile to invest and put in place IMA to reduce the expected capital increase,” observes Clarsen.
Persistent regulatory timeline uncertainty is a primary implementation challenge of FRTB in Asia Pacific local jurisdictions, the survey also found. Therefore, the survey findings indicate that starting implementation earlier is a good approach.
While many banks surveyed are not looking at cloud infrastructure to enable the adoption of SA and IMA risk calculation models, 30 percent of firms are factoring in a hybrid approach.
The survey also found that the largest banks thought their commodities and credit business would be most impacted by the regulatory change, whereas overall, the majority identified FX and interest rates as the most-heavily impacted business lines.