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Part III Quantitative Capital Requirements, 10 Position Risk and Market Risk Measures Fundamental Review of the Trading Book »

Umberto Cherubini
From: Capital and Liquidity Requirements for European Banks (1)
Edited By: Bart P.M. Joosen, Marco Lamandini, Tobias H. Tröger
This chapter describes the concept of market risk measures, starting with a review of the long-standing debate on risk measures. It provides an overview of the main structure and (non-quantitative innovations) that will be introduced by the Fundamental Review of the Trading Book (FRTB) from the point of view of a ‘quant’. The chapter then looks at the quantitative procedures required to compute the capital charge for both the standardised and the internal model, before discussing the question that risk factors are prices, the regulatory prescriptions to define whether the prices observed are sufficiently transparent to deem the risk factors ‘modellable’, and how to address the other risk factors (Non Modellable Risk Factors). It also considers backtesting and profits and loss (P&L) attribution, and the degree of association between prices used in trading and risk management. Finally, the chapter examines the pros and cons of the new standards, the increase in regulatory costs, and the prospects of choice in the banking systems, before assessing the transposition of the Basel soft law into regulations such as the Capital Requirements Regulation (CRR) and CRR II.