ECB response to targeted consultation on the market risk prudential framework

The European Central Bank (ECB) has published its staff contribution to the European Commission's (EC) targeted consultation on the application of the market risk prudential framework (FRTB). The ECB welcomes the proposal to have the FRTB enter into force in the EU on 1 January 2027. It argues that further delaying the implementation of the FRTB would come with clear costs from a risk management and operational perspective. The ECB favours the three-year period of stability in the applicable market risk framework proposed by the EC. With respect to the temporary measures proposed for the delegated act, the ECB believes there is room to make these proposed amendments more risk-based and sound without adversely affecting the EC's objective of maintaining a level playing field with other jurisdictions. Regarding internal model-related requirements, the ECB agrees with using the Profit and Loss Attribution Test (PLAT) as a monitoring tool only, on the understanding that banks work on remediation in the event of highly concerning results. It considers the measures regarding the Risk Factor Eligibility Test (RFET) could be too far-reaching in their current form and would prefer this relief measure be limited to new risk factors. Equally, with regard to collective investment undertakings (CIUs), the ECB continues to consider that the proposal allowing banks to carry out the look-through on a quarterly basis for material exposures under both FRTB-AIMA and FRTB-ASA, rather than on a weekly basis as currently foreseen in the Capital Requirements Regulation, would not be sufficient to adequately capture the underlying risks of CIU exposures.

The ECB believes that level playing field concerns regarding the requirements applicable to CIUs are sufficiently addressed by the proposal to allow banks to calculate their own funds requirements on CIU exposures with a partial look-through if they are able to look through at least 90% of the CIU exposures. The ECB suggests that it may be necessary to apply a floor to the total possible reduction of market risk RWAs from which banks can benefit, given that the cumulative impact of the proposed amendments could be disproportionate for some banks and significantly water down the regulatory intent of introducing the FRTB. On the calibration options for the multiplier for the capital requirements, which would aim to cap increases in capital requirements for market risk which certain banks could experience, the ECB explains that it prefers the bank-specific, static multiplier option suggested, but warns that each of the proposed multipliers would raise implementation challenges and could in theory have distributional effects within the banking sector.

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