The Basel Committee's finalised fundamental review of the trading book (FRTB) marks another milestone in regulators' long and conflicted relationship with securitisation. While the final draft is less punitive than early versions suggested it might be (SCI 15 January), it is still set to limit market liquidity and trading activity.
The final version of the FRTB has provided extra clarity to the market, but there is not much difference from earlier versions in terms of the mechanics. It provides an extra burden for banks and we have already seen those banks massively reduce their trading activities. For credit risk, it looks like trading is becoming unattractive. On the one hand, the ECB is pushing ABS and on the other hand, it is making it very difficult.
Werner Gothein, Partner, BearingPoint
The final version of FRTB reduces credit spread widening shocks to measure market risk across securitisation tranches, which will replace banks' existing approach to market risk. Securitisation capital requirements under the final framework will therefore be far lower than anticipated using the July 2015 assumptions, but will still be higher than current capital requirements.