Coronavirus Crisis Highlights Need for More Informed Risk Calculations

The novel coronavirus has wreaked havoc on the market as firms execute their business continuity plans. More than a decade after the financial crisis, the escalating global pandemic is testing the industry’s ability to withstand sudden, violent jolts. One upcoming regulation—the Fundamental Review of the Trading Book (FRTB)—could serve as a navigation system for such stormy seas.

Introduced in 2016 and slated to go live at the start of 2022, FRTB will require banks to calculate the sensitivities of their trading positions to market forces.

“When you look at what’s happening and how many standard deviation moves we’re seeing in the market right now, when you see how much this is impacting liquidity, I think what we’ll talk about at the back-end of it specifically as it relates to FRTB, [is]: when you look at modeling your risk factors, how much data was actually available during periods of stress?” says Brad Foster, global head of enterprise content at Bloomberg.

Under FRTB—designed in reaction to what transpired during the 2008 financial crisis and part of the Basel III framework—banks will need to source historical data on the assets they own, using time-series datasets that date back at least 10 years in order to back-test and stress-test those assets under varying economic conditions. This crisis will ultimately be a test of the safeguards put in place over the past 12 years, as well as almost certainly inspire new ones and reviews of existing ones.

Over the last decade, banks have worked to implement specific, defined risk measures, and that process continues. But in the bigger picture, says Bloomberg’s head of market risk Eugene Stern, that means they’ve also had to establish best practices for data management and analytics consistency across their organizations.

And the journey to FRTB compliance might be a good way for banks to achieve that—which won’t be a bad tool to have in the belt with a market like today’s, where a firm’s risk models are only as good as its data.

So even if banks have not fully implemented FRTB today, having already begun the search for best practices gives them more resiliency than before, Stern says.

“To what extent is that going to impact this specific market? Depends. I think we’re still early enough in the cycle that we’re not going to be able to speak to lessons learned until later,” he says. “But I think that it’s certainly true that through the evolution of the rules and best practices, banks certainly come to a place where they are more resilient today, even without FRTB having gone fully live yet. As to the extent we gather fruits of that system-wide now, we’ll have to wait and see .”

[Editor’s Note: The original headline was changed because it was not clear as to how the industry was rethinking the need of FRTB.]