Featuring experts from ISDA, Lloyds Bank, Nomura, Deutsche Bank, and Nordea
Through the Fundamental Review of the Trading Book (FRTB), the Basel Committee on Banking Supervision is aiming to iron out much of the risk from banks’ wholesale trading activities. But the complexity, lack of clarity and timelines involved have caused many headaches for risk professionals.
Xavier Bellouard, Managing Director and Co-Founder, ActiveViam, chaired a panel at RiskMinds International 2019, looking at the impact these changes were set to have on business models.
How are FIs impacted by the new regulations?
Panayiotis Dionysopoulos, Head of Capital, ISDA, told delegates what working groups had learnt from modelling the implementation of the standardised approach. He was keen to impress that there is a universal interest in getting it right and reducing variability and improving the quality of capital models. Coordination is crucial, he said, to maximise efficiencies and eliminate duplication.
At Lloyds Bank, Suman Datta, Head of Portfolio, Quantitative Research, and his colleagues have also been modelling the standardised approach. He has found that it has led to a more coordinated approach between front office and risk functions, which are likely to become more tied together and integrated. Sharing data between functions is one of the big business decisions that has already happened as a result, he said.
The standardised model can reveal differences and divergences in processes that banks can correct. But a big question remains over how well it is able to capture all the risk, and how risk sensitive it is.
Eduardo Epperlein, Managing Director, Global Head of Risk Methodology, Nomura, talked to the costs being discussed to implement the new regulations. There is a lot of focus on the capital expenditure needed, he said, and lots of firms are trying to assess if it’s really worth it. However, they need to look at what they are
actually spending the money on: some aspects of the changes made to infrastructure are valuable in their own right, irrelevant of FRTB.
On this point, Jochen Theis, Head of Market Risk Methodology at Deutsche Bank, added that the investment in FRTB was a sunk cost, something that had to be done, but the bigger point was how much it cost to run on an ongoing basis. Banks had to shape their models and infrastructure in such a way that it did not continue to cost as much as it might to set up.
He argues FRTB creates at opportunity to bring in a more streamlined structure. This might mean that thought needs to be given to budgets – if there is a single system being used, does it make sense to have a single budget?
Given the uncertainty and tight timelines involved though, banks should not be side-tracked by putting in place temporary solutions: they need to focus on making the best of the investment.
Thomas Hougaard, Chief Risk Analyst, Change Owner for Risk Platform and FRTB, Nordea, said constantly shifting deadlines had resulted in a ‘Peter and the Wolf’ type scenario, where people were starting to believe nothing would ever happen. Although companies weren’t going to understand everything from the beginning, that didn’t mean they shouldn’t be taking action now – and have a plan and vision of where they wanted to go. It is important, however, that companies recognise it is a moving target and they shouldn’t waste energy when facts on the ground are changing.
Datta seconded this view, and said the constantly changing state of play created a logistical challenge and meant it made more sense to work in an agile way rather than the typical waterfall fashion.
While there are a lot of questions still to be answered, the consensus was FRTB should be seen as an opportunity to harmonise your business – in terms of technology, systems and structure, as well as culture.
