Model Risk Management Challenges of Fundamental Review of Trading Book

Fundamental Review of Trading Book (FRTB) is a collection of new regulations by Bank of International Settlements (BIS) that regulates the market risk capital charge that a bank has to allocate towards its capital reserves. The objectives of this study is to investigate how FRTB will impact banks from various perspectives, such as their capital reserve allocation, internal processes, work-related interaction between front offices and risk offices, and organisational structures. It was observed that the impact of FRTB has a wide ranging in uence on the overall banking system and not only on the aspect of risk management. The study revealed that FRTB will lead to an increase in banks' regulatory capital charge due to some new features that have been added to the methods of calculating regulatory capital, such as Non Modellable Risk Factors (NMRF) and Residual Risk Add-On (RRAO). FRTB was also found to require an improved data management system, and in addition there is need for front and risk offces of a bank to actively engage each other.