Wolters Kluwer Financial Services warns Australian Banks of FRTB impact

Some Australian banks will need to reconsider their business strategy due to significant regulatory changes included in The Fundamental Review of the Trading Book (FRTB). That’s according to a new white paper by Wolters Kluwer Financial Services, titled “Fundamental Review of the Trading Book: Impact on Financial Institutions in Australia.”

The requirement to meet heightened risk and regulatory capital calculation obligations included in the FRTB may necessitate investing in new, sophisticated IT infrastructure. This will be costly and may force banks to completely re-assess their business plans, the white paper notes.

The FRTB is the latest revision of trading book capital rules by The Basel Committee for Banking Supervision that aims to ultimately reduce global financial risk. It deals with what it considers to be weaknesses in the current design of the regulatory capital framework as it relates to the trading book by applying more rigorous qualification requirements for the trading and banking books, seeking changes in the constitution of both.

Under FRTB rules, banks will need to respond rapidly and accurately to regulators’ enquiries, whether scheduled or ad-hoc. Moreover, in order to optimize their capital under the new rules, banks will be required to identify all asset classes and trading desks that contribute to capital charge. All affected portfolios will need to be analysed and optimized according to capital parameters. As such, underlying data must be consistent and IT infrastructure must be sophisticated enough to analyse large amounts of data, yet flexible and fast enough to extract required information for regulators at any time.

“The cost consideration may be the key factor in determining whether some market participants decide to completely overhaul their business strategy, concluding that the new rules are too onerous and compliance is too difficult and costly,” notes Soon Kit Tham, risk specialist at Wolters Kluwer Financial Services and author of the report. “Much of what is being proposed in the FRTB could be implemented in 2017. Banks need to start planning and implementation as soon as possible, in order to allow for adequate testing time. Put simply, time is running out.”