TY - JOUR
T1 - The fundamental review of the trading book
T2 - implications for portfolio and risk management in the banking sector
AU - McCullagh, Orla
AU - Cummins, Mark
AU - Killian, Sheila
PY - 2022/3/31
Y1 - 2022/3/31
N2 - 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.
AB - 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.
KW - Basel III
KW - fundamental review of the trading book
KW - risk management
KW - portfolio management
KW - value-at-risk
KW - P&L attribution tests
UR - https://onlinelibrary.wiley.com/journal/15384616
M3 - Article
JO - Journal of Money, Credit and Banking
JF - Journal of Money, Credit and Banking
SN - 0022-2879
ER -