Speech
As market shocks become more likely, strong market risk rules are essential for financial stability. Weakening or delaying the FRTB would repeat past mistakes and risk future taxpayer-funded bank bailouts.
The Fundamental Review of the Trading Book (FRTB) has been developed to address the inherent limitations of the current internal-model approach to market risk. These models fail to adequately capture fat-tail risks and liquidity risks, leading to an underestimation of market risk in periods of stressed conditions for institutions using the Internal Models Approach (IMA). The FRTB will reinforce banks’ data and model assumptions, which are essential for ensuring trust and reliability in banks’ risk management.
Given the escalating geopolitical tensions in the world and the increasing risk of market shocks related to a potential AI bubble, growth of private credit or sovereign debt, we are likely to experience even more stressed market conditions going forward. The European Commission (EC)’s role as a regulator is crucial in ensuring the stability of the EU financial system. As we navigate potentially stressful times, a robust market risk framework is indispensable. While the FRTB may appear more conservative in certain aspects, it is essential to safeguard society from another financial crisis by addressing long-standing flaws in the market risk management framework. Considering the essential investment needs of the EU related to its climate objectives, innovation, and defence, ensuring the stability of the financial system and its ability to keep financing the economy should be a political priority.
The EU shouldn’t run the risk of another taxpayer-sponsored bailout of private banks due to the mismanagement of risks, particularly in today’s environment of high government debt levels in certain EU countries. The decision by other jurisdictions, namely the US & the UK, to delay the FRTB implementation, thereby risking financial instability, is a gamble that the EU should not take. Embracing the FRTB should be viewed as an opportunity for improvement towards resilience, not merely a cost. Ensuring financial stability for the coming years would be a decisive advantage over markets that the EC has intended to copy.
