The European Commission has postponed the adoption of the market risk framework, part of the EU Basel III standards, by one year.
The fundamental review of the trading book (FRTB) aims to align capital charges more closely to the actual risks that banks face in their capital markets activity. It calls for a stricter separation of positions between the trading and banking book, the introduction of a standardised approach to market price risk and new regulations around the use of internal models.
During its monitoring of Basel standard implementation, the European Commission has noted a lack of finalisation and implementation timelines from a number of major jurisdictions. Aligned implementation is important, it stated, highlighting the risk of delays and deviations undermining the credibility of the standards.
As such the Commission has postponed the entry into force of this element of the standards. The bulk of Basel III standards will come into play for EU banks from 1 January 2025, with the market risk framework introduced from 1 January 2026.
Responding to the announcement, the Association for Financial Markets in Europe (AFME) shared its support of the European Commission’s decision and agreed that both international alignment and more clarity on substance and timing was required.
Caroline Liesegang, managing director and head of capital and risk management, sustainable finance and research at AFME stated: “The European Commission’s complementary Q&A takes into consideration and clarifies the implications a delayed implementation would have on other elements of the EU’s banking regulatory framework These elements are intrinsically linked to the market risk framework and could create significant challenges for banks if not addressed accordingly.”
However, it added that there are other areas of concern that have not yet been addressed. Liesegang continued: “We are disappointed in the Commission’s conclusion not to address the credit valuations adjustment framework (CVA) and the profit and loss attribution test (PLAT). In our view, given the interdependence of the various regulatory frameworks, an aligned timeframe of implementation and transition is important to avoid operational inconsistencies. We look forward to a continuing dialogue with the Commission and the EBA as these issues evolve and as the broader international picture becomes clearer.”
“Further work remains to be done. It is crucial that the EU’s implementation of the Trading Book/Banking Book boundary (TB/BB boundary) is consistent with the timeline invoked by the delegated act to delay both the FRTB Standardised Approach and the FRTB Internal Model Approach capital calculations and therefore, we welcome the guidance issued to the European Banking Authority to instruct supervisors to delay the implementation of the TB/BB boundary as they have done previously.”
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