PwC: Fundamental Review of the Trading Book likely to drive banks away

By Rob Starr, Content Manager, Big4.com

According to a PwC report released today in conjunction with the Basel Committee on Banking Supervision’s deadline for responses to the Fundamental Review of the Trading Book (FRTB) consultation document released in May 2012,  a range of measures proposed under new trading book rules will likely cause banks, investors and regulators to place greater emphasis on standardised (i.e. regulator determined), as opposed to internally modelled, capital requirements.

“While the regulators’ intent is to more closely align standardised and internal approaches, and improve risk sensitivity of regulatory capital, the unintended consequence may be that banks question the value of investing in and maintaining sophisticated models,” said Miles Kennedy, financial services partner at PwC.

Richard Barfield, financial services director at PwC made other comments:

‘We do not expect a dramatic increase in overall regulatory capital requirements, but there will be individual winners and losers. The larger firms that use internal models are likely to see a capital increase and those on standardised approaches greater capital volatility, but until the parameters are defined, we will not know by how much,” he said. “These changes – particularly to convergence of capital calculations under each method, the need to produce both sets of numbers, and the existence of capital floors – will reduce the perceived benefit of creating and maintaining internal models.”