Abstract
The Fundamental Review of the Trading Book (FRTB) is the promised overhaul of bankmarket risk regulation. FRTB retains the authorized use of proprietary risk models, however, it introduces two additional criteria: (i) P&L attribution (PLA) tests and (ii) desk-level backtests. We examine empirically whether these additional criteria influence risk management and portfolio management practice, specifically portfolio construction and choice of risk model. We find that the PLA tests demand significant alignment with risk factors, however, the backtests do not incentivize use of superior risk models. This has important implications for the efficacy of the capital-based regulatory system.
Original language | English |
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Pages (from-to) | 1785-1816 |
Number of pages | 32 |
Journal | Journal of Money, Credit and Banking |
Volume | 55 |
Issue number | 7 |
Early online date | 28 Feb 2023 |
DOIs | |
Publication status | Published - Oct 2023 |
Keywords
- Basel III
- fundamental review of the trading book
- risk management
- portfolio management
- value-at-risk
- P&L attribution tests