Basel’s FRTB QIS: Why the Difference?

The Basel Committee on Banking Supervision’s impact studies are useful. They provide regulators with a crucial insight into the possible effect of new capital rules, before those rules are fully finalized. The public release of those studies is also a good thing. Banks, analysts and the media are able to get an early indication of the possible aggregate impact on capital levels, and scrutinize and debate those figures.

The recent release by the Basel Committee of an interim quantitative impact study (QIS) on the Fundamental Review of the Trading Book (FRTB) was therefore greeted with some anticipation. Inevitably, comparisons were made with a recent study published by ISDA, the Global Financial Markets Association and the Institute of International Finance, and run by Global Association of Risk Professionals. Equally inevitably, there was some puzzlement about differences in the numbers.

We thought it would be helpful to explain why. Most importantly, the two reports are looking at different things. The Basel Committee’s impact study uses December 2014 numbers, and is based not on the most recent QIS conducted by the Basel Committee based on June 2015 data (known as QIS 4), but the one before (QIS 3). The Basel Committee has made changes to the framework since QIS 3, including the addition of a residual risk add-on in the standardized approach. Securitization was also not included in the scope of QIS 3, but was added to QIS 4. That means these components, which were two big contributors to the capital numbers included in the industry report, are not incorporated in yesterday’s Basel Committee release.

In comparison, the industry study represents the aggregate results of actual QIS submissions from 28 banks, as part of Basel’s QIS 4 exercise. That QIS exercise was based on submissions that were made to the Basel Committee in early October 2015. QIS 4 was run after the residual risk add-on and the securitization requirements were added to the proposed framework via QIS instructions from the Basel Committee. According to the industry study, the residual risk add-on accounts for 47% of total market risk capital under the standardized approach. The results also show a 2.2 times increase in capital requirements for securitization.

These differences (QIS 3 versus QIS 4; December 2014 data versus June 2015 data) clearly mean the two sets of results can’t be compared like for like.

In its study, the Basel Committee writes:

“Further analysis is being performed in the next trading book QIS (based on end-June 2015 data) to assess any need for further recalibration of the parameters.”

We look forward to a release on the most recent QIS exercise, and we remain committed to constructively work with the Basel Committee to finalize the FRTB framework.

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