Big banks to spend $200 million on preparing for FRTB regulation

09 August 2018 4 min. read
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A number of the world’s largest banking entities are set to be hit by some $200 million in new trading rule costs. The so-called Basel regulations are due to take effect in 2019 and will create need for an additional 2,000 staff, along with creating a number of other costs to remain compliant.

The Basel Committee on Banking Supervision is a committee of banking supervisory authorities which was established by the central bank governors of the Group of Ten countries (a precursor of what is now the G7) in 1974. Since its foundation, the group has provided a forum for regular co-operation on banking supervisory matters, something which in the post-recession years has been extremely important in laying out plans to avoid a repeat crisis in the financial sector since 2008.

The latest example of how the Basel Committee is working to this end comes in the form of the Fundamental Review of the Trading Book, or FRTB. The set of new rules looks to overhaul the way banks treat the risk of the bonds, stocks, commodities and other assets they hold in the short term so they can facilitate clients’ trading. The rules have recently undergone a series of amendments, following fears of large costs to big banks, with the earliest iteration expected to increase capital demands for some banks by as much as 800%. Since then, the Basel Committee has revised the rules to ease the burden on financial institutions, but banks will still have to increase capital significantly for some activities.

Big banks to spend $200 million on preparing for FRTB regulation

According to consulting firm Oliver Wyman, which produced the new cost estimates of implementing the fundamental review of the trading book rules after studying the plans of 20 European, US and Asian banks with large trading businesses, implementation costs will likely range from $100 million to above $200 million. While this is a small percentage of big banks’ total annual cost bases, estimated at about $60 billion, the new costs still dwarf the $43 million to $129 million estimates which the same consultants produced just 12 months ago, suggesting that the true extent of the regulations might be hard to predict, and could be even higher.

According to Oliver Wyman’s Aude Schonbachler, Partner - Head of EMEA Capital markets risks, the mismatch between the expected costs of FRTB of last year and of 2018 represent banks having been caught in the early stages of costing, at which point a number of them underestimated the sizable effort required. The latest Oliver Wyman research on the matter puts the industry-wide costs of implementation for FRTB at an eye-watering $5 billion, including more than $500 million which has already been spent. So far, most of the fees have been sourced for “impact studies and planning”, but the consultancy expects that banks will have to add at least 2,000 new staff to their FRTB programmes, through a combination of hiring new staff, reassigning existing staff and using consultants, in order to meet the new requirements without sanction by the end of 2019.

While implementation could still be delayed, as the EU issued a directive suggesting a three year implementation period and the regulatory policies of the American and European authorities recently missed a critical deadline for agreeing on how banks should treat the riskiness of their loans – however, many banks are understandably still keen to work to the original deadline. Indeed, Schonbachler agreed that adopting a wait and see attitude amid the current labour market could be incredibly risky, as IT market risk analysts are already “extremely difficult to hire” in London. Because the UK particularly faces an ageing population and a constriction of talent moving from the EU following Brexit, even banks that have started early might have to make their implementation plans less ambitious.

Remarking on the state of play, Schonbachler said, that some banks said they would prioritise investing in areas such as US stress testing, the only regulatory programme with higher costs than the FRTB, before elaborating, “The banks are quite cost conscious and resource constrained.”

She added that time is a particularly precious commodity for banks looking to implement FRTB for a different reason, too, noting that banks will receive the best capital treatment if they use internal models to calculate their risk, but these models take a long time to design. “As they progress in the implementation it is likely that they will end up having to do some shortcuts if the timeline of end 2019 is not pushed back,” she concluded.

Related: Excelian Luxoft supports bank with FRTB compliance programme.