Abstract
The Fundamental Review of the Trading Book (FRTB) is the promised overhaul of bank market risk regulation. FRTB retains the authorised 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 incentivise 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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Journal | Journal of Money, Credit and Banking |
Early online date | 28 Feb 2023 |
DOIs | |
Publication status | E-pub ahead of print - 28 Feb 2023 |
Keywords
- Basel III
- fundamental review of the trading book
- risk management
- portfolio management
- value-at-risk
- P&L attribution tests