The Fundamental Review of the Trading Book (FRTB) introduces changes in capital requirements as a consequence of changes in the calculation of risk weighted assets (RWAs), as agreed in the Basel Committee on Banking Supervision. This report performs an ex-ante assessment of the benefits of this new legislative proposal and is included as an annex to the Impact Assessment of the Capital Requirement Regulation II (CRR II).The analysis is conducted by estimating the required variation in banks’ capital following the implementation of the legislative changes by using econometric and statistical techniques. The estimated capital requirements are then used to feed a simulation model of losses originating from the banking sector in the event of a banking crisis. Results of the crisis simulation before and after the introduction of the legislative changes are compared to arrive at an estimation of the impacts. Benefits are measured as reduction in banks’ losses that need to be absorbed by different stakeholders, starting from shareholders and including the whole loss absorption cascade and financial safety net (i.e. bail-in and resolution funds). The main conclusions are:1. If one ignores the leverage ratio (LR) requirement and only focusses on the impact of the FRTB, results are the following:a. When assuming banks’ capital equal to the minimum capital requirement (MCR), the implementation of the FRTB implies higher capitalization levels/needs due to higher RWAs. The estimated reduction in potential public finance contingent liabilities from the banking sector in case of a crisis similar to the last one is of 15%. b. However, when considering the excess capital buffers which the vast majority of banks have set aside over the last few years, the implementation of the FRTB does not imply additional capital needs to meet the increased requirements and does not reduce potential contingent liabilities from the banking sector compared to the status quo. In fact, if buffers are not increased, contingent financial liabilities would increase, owing to increased recapitalization needs following the increase in RWAs.2. Irrespective of whether RWAs are computed following the current regulation or under the FRTB, capitalization levels/needs tend to be higher under an LR requirement. Moreover, for all banks for which the LR requirement would be binding, recapitalization needs would increase in case of crisis in case no additional buffers on top of the minimum LR requirement would be held. However, if we assume that banks will hold additional “conservation” buffer on top of the LR, the amount of potential contingent liabilities can be reduced up 48% with the implementation of the FRTB.

Alessi, L., Cannas, G., DI GIROLAMO, F., Papanagiotou, E., Ossola, E., PETRACCO GIUDICI, M., et al. (2016). Estimation of potential benefits of the implementation of the fundamental review of the trading book and leverage ratio [Altro] [10.2791/988150].

Estimation of potential benefits of the implementation of the fundamental review of the trading book and leverage ratio

OSSOLA E;
2016

Abstract

The Fundamental Review of the Trading Book (FRTB) introduces changes in capital requirements as a consequence of changes in the calculation of risk weighted assets (RWAs), as agreed in the Basel Committee on Banking Supervision. This report performs an ex-ante assessment of the benefits of this new legislative proposal and is included as an annex to the Impact Assessment of the Capital Requirement Regulation II (CRR II).The analysis is conducted by estimating the required variation in banks’ capital following the implementation of the legislative changes by using econometric and statistical techniques. The estimated capital requirements are then used to feed a simulation model of losses originating from the banking sector in the event of a banking crisis. Results of the crisis simulation before and after the introduction of the legislative changes are compared to arrive at an estimation of the impacts. Benefits are measured as reduction in banks’ losses that need to be absorbed by different stakeholders, starting from shareholders and including the whole loss absorption cascade and financial safety net (i.e. bail-in and resolution funds). The main conclusions are:1. If one ignores the leverage ratio (LR) requirement and only focusses on the impact of the FRTB, results are the following:a. When assuming banks’ capital equal to the minimum capital requirement (MCR), the implementation of the FRTB implies higher capitalization levels/needs due to higher RWAs. The estimated reduction in potential public finance contingent liabilities from the banking sector in case of a crisis similar to the last one is of 15%. b. However, when considering the excess capital buffers which the vast majority of banks have set aside over the last few years, the implementation of the FRTB does not imply additional capital needs to meet the increased requirements and does not reduce potential contingent liabilities from the banking sector compared to the status quo. In fact, if buffers are not increased, contingent financial liabilities would increase, owing to increased recapitalization needs following the increase in RWAs.2. Irrespective of whether RWAs are computed following the current regulation or under the FRTB, capitalization levels/needs tend to be higher under an LR requirement. Moreover, for all banks for which the LR requirement would be binding, recapitalization needs would increase in case of crisis in case no additional buffers on top of the minimum LR requirement would be held. However, if we assume that banks will hold additional “conservation” buffer on top of the LR, the amount of potential contingent liabilities can be reduced up 48% with the implementation of the FRTB.
Altro
Scientifica
Trading book, Leverage ratio, Basel Committee, Banking Supervision
English
Alessi, L., Cannas, G., DI GIROLAMO, F., Papanagiotou, E., Ossola, E., PETRACCO GIUDICI, M., et al. (2016). Estimation of potential benefits of the implementation of the fundamental review of the trading book and leverage ratio [Altro] [10.2791/988150].
Alessi, L; Cannas, G; DI GIROLAMO, F; Papanagiotou, E; Ossola, E; PETRACCO GIUDICI, M; Rossi, E
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Utilizza questo identificativo per citare o creare un link a questo documento: https://hdl.handle.net/10281/369107
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