Basel III FRTB: data pooling innovation to lower capital charges

Abstract

Background Anticipated to overhaul the structure of market risk teams, IT teams, and trading desks within banks by 2023, Basel III's Fundamental Review of the Trading Book requirements will also increase capital charges banks will incur globally. The case study focuses on describing what is needed with regards to the risk factor eligibility test (RFET) as well as for implementing a data pool to lower capital charges. By establishing a consortium of banks per region to implement a data pooling solution, participants can prove a wider breadth of modellable risk factors per asset class and use the Internal Models Approach (IMA) of valuing risk to lower capital charge requirements significantly. Case description First, a description on the historical context surrounding the Fundamental Review of the Trading Book rules and the business requirements needed to comply with the risk factor eligibility test is made. Then an examination is conducted on the innovative data pooling initiative implemented by CanDeal, TickSmith Corp., and the 6 largest Canadian banks to lower capital charge requirements under the Fundamental Review of the Trading Book. Discussion and evaluation A description is made on what types of data, expertise, and technology is needed to calculate for risk factor modellability. It is up to each firm to decide if the benefits to using the Internal Models Approach to lower capital charges outweighs implementation and running costs of the underlying data platform. Implementing a data pool for each region comes with challenges that include anti-competition law that may block the initiative, varied benefits to each competitive participant, and data security concerns. Conclusion It is evident that the data pool innovation provides benefits to lowering capital charges as the Canadian banks have seen an increase of modellability by several factors using the sample bond asset class. While each firm must still determine internally if the benefits outweighs the technological costs they will incur, it is clear that regulators are pushing for increased data retention and scrutiny.

RegTech in public and private sectors: the nexus between data, technology and regulation

“…Other papers are concerned with RegTech in crisis resolution (ResTech), as its application in this area can support resolution authorities in their work to develop resolution plans and the resolving of financial firms (Loiacono & Rulli, 2021). Others still evaluated the ramifications of RegTech in the light of specific regulations, such as the Basel III regulatory framework (Huang, 2021). As the market evolves and more RegTech applications emerge, we can expect that the academic literature will turn up the spotlight on specific applications, possibly adopting more quantitative methodologies as data become more available.…”