The fundamental review of the trading book: implications for portfolio and risk management in the banking sector

Orla McCullagh, Mark Cummins, Sheila Killian

Research output: Contribution to journalArticlepeer-review

67 Downloads (Pure)

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 languageEnglish
Pages (from-to)1785-1816
Number of pages32
JournalJournal of Money, Credit and Banking
Volume55
Issue number7
Early online date28 Feb 2023
DOIs
Publication statusPublished - Oct 2023

Keywords

  • Basel III
  • fundamental review of the trading book
  • risk management
  • portfolio management
  • value-at-risk
  • P&L attribution tests

Fingerprint

Dive into the research topics of 'The fundamental review of the trading book: implications for portfolio and risk management in the banking sector'. Together they form a unique fingerprint.

Cite this