Critical Analysis of the New Basel Minimum Capital Requirements for Market Risk

Joerg Orgeldinger


In its October 2013’s consultative paper for a revised market risk framework (FRTB), and subsequent versions published thereafter, the Basel Committee suggests new ways of dealing with market risk in banks’ trading and banking books. The Basel Committee estimates that the new rules will result in an approximate median capital increase of 22% and a weighted average capital increase of 40% [1], compared with the current framework. Key changes can be found in the internal model approach, in the standard rules and in the scope/approval process. Among the significant changes that are being introduced by the FRTB is a stricter separation of the trading book and banking book. Regardless of whether they use standardised or internal models, banks will need to review their portfolios to determine if existing classifications of instruments and desks as trading book or banking book are still applicable or whether a revision of desk structure is needed. In this article, we analyse the theoretical foundations of the internal model approach (IMA), which are the stressed expected shortfall, liquidity adjustments, default & migration risk and non-modellable risk factors. We thoroughly investigate the criticisms for Internal Risk Model (IMA) and the introduction of a standardised floor, the sensitivity based approach (SBA) with Delta, Vega and Curvature, shock scenarios and the aggregation with asymmetric correlation and reflection of basis/default risk.


Fundamental Review of the Trading Book; IMA; Revised Standardized Model; Factor Models; Risk Contribution.


BCBS. ‘Explanatory note on the revised minimum capital requirements for market risk’, (2016).

BCBS. ‘STANDARDS - Minimum capital requirements for market risk’, (2016).

Deloitte. ‘Global Risk Watch Newsletter – Worsening allergies to uncertainty in the global financial markets, in: Global Risk Watch Vol. 11, (2016).

KPMG Canada. ‘Fundamental review of the trading book – A brief overview’ KPMG publications, (2016).

PWC. ‘First Take, Ten key points from Basel’s fundamental review of the trading book.’, (2016).

Accenture. ‘Fundamental review of the trading book – Trading in the future.’ (2016).

Laurent, Jean-Paul, Michael Sestier, and Stéphane Thomas. "Trading book and credit risk: How fundamental is the Basel review?." Journal of Banking & Finance 73 (2016): 211-223.

Jorion, P. ‘Framework for assessing the market risk’, Working paper Universiy of California at Irvine, (2004).

Fricke, Jens. Value-at-Risk Ansätze zur Abschätzung von Marktrisiken: theoretische Grundlagen und empirische Analysen. Springer-Verlag, 2007.

Wernz, J., ‘Bank management and control.’ Heidelberg: Springer Verlag, (2014).

Wilkens, Sascha, and Mirela Predescu. "Incremental default risk (IDR): Modeling framework for the” Basel 4” risk measure." Available at SSRN 2638415 (2015).

Racheva-Iotova, B. ‘An Integrated System for Market Risk, Credit Risk and Portfolio Optimization Based on Heavy-Tailed Models and Downside Risk Measures.’ Thesis. LMU Munich, (2010).

Lobanov, Alexey. "Current trends in prudential regulation of market risk: From Basel I to Basel III." In Market risk and financial markets modeling, pp. 129-139. Springer Berlin Heidelberg, 2012.

Chang, Chia-Lin, Juan-Ángel Jiménez-Martín, Esfandiar Maasoumi, Michael McAleer, and Teodosio Pérez-Amaral. A Stochastic Dominance Approach to the Basel III Dilemma: Expected Shortfall or VaR?. No. 15-056/III. Tinbergen Institute Discussion Paper, 2015.

Wang, R. ‘Regulatory arbitrage.’ Working paper. Waterloo: University of Waterloo, (2015).

Bugár, Gyöngyi, and Anita Ratting. "Revision of the quantification of market risk in the Basel III regulatory framework.", Vol. 15 Issue 1, pp. 33–50: (2016).

Christensen, P. and J. Hansen ‘A fundamental review of the trading book – an analysis of the evolution of the standardised approach.’ Master thesis. Aarhus University, (2014).

BCBS ‘Frequently asked questions: Impact study on the proposed frameworks for market risk and CVA risk’, (2015).

BCBS ‘Fundamental review of the trading book: Outstanding issues (consultative paper 3)’, (2015).

BCBS ‘International convergence of capital measurement and capital standards: A revised framework’, (2005).

BCBS ‘Regulatory consistency assessment program (RCAP) - Second report on risk-weighted assets for market risk in the trading book’, (2013).

BCBS ‘Reducing excessive VARiability in banks’ regulatory capital ratios - A report to the G20’, (2014b).

BCBS ‘Instructions for Basel III monitoring - Version for banks providing data for the trading book part of the exercise’, (2015).

BCBS ‘Instructions: Impact study on the proposed frameworks for market risk and cva risk’, (2015).

BCBS ‘Fundamental review of the trading book (consultative paper 1)’, (2012).

Acerbi, C. and Balasz, S. ‘Backtesting of expected shortfall’ Risk Magazine, (2014).

BCBS ‘STANDARDS - Minimum capital requirements for market risk’, (2016).

Christofferson, P. F. ‘Risk management and financial returns’ Power Point Presentation. 2nd edition. (2012).

Sornette, Didier, and Susanne von der Becke. "Financial Market and Systemic Risks." In Market Risk and Financial Markets Modeling, pp. 3-6. Springer Berlin Heidelberg, 2012.

Wilkens, Sascha, and Mirela Predescu. "Incremental default risk (IDR): Modeling framework for the” Basel 4” risk measure." Available at SSRN 2638415 (2015).

Hull, J. ‘VAR versus expected shortfall’, in: Risk magazine, in Risknet. (2007).

Alexander, Gordon J., Alexandre M. Baptista, and Shu Yan. "Bank regulation and stability: an examination of the Basel market risk framework." (2012).

Ferreira, Miguel. "Market risk charge of the trading book: a comparison of the Basel II and Basel III." PhD diss., 2015.

Kou, Steven, and Xianhua Peng. "Comments on the Consultative Document “Fundamental Review of the Trading Book” Released by Bank for International Settlement on May 3 rd, 2012.".

Sayah, Mabelle. "Analyzing and Comparing Basel's III Sensitivity Based Approach for the interest rate risk in the trading book." Applied Finance and Accounting 2, no. 1 (2016): 89-100.

Gnutti, R. ‘Fundamental review of the trading book: il nuovo contesto metodologico e l’applicazione ad un portafoglio di trading.’ Presentation Banca Intesa SanPaolo. (2015).

Wimmerstedt, Lisa. "Backtesting Expected Shortfall: the design and implementation of different backtests." Stockholm: KTH Royal institute of technology, (2015).

Full Text: PDF

DOI: 10.28991/esj-2017-01111


  • There are currently no refbacks.

Copyright (c) 2017 joerg orgeldinger