The European Commission has kicked off a crucial consultation process that might redefine how banks on the continent will cope with market risk. The current consultation is specifically targeting the Fundamental Review of the Trading Book framework. It is a complex element of Basel III aimed at improving capital thresholds for trading business. The process will conclude on January 6, 2026. This is a short period for all concerned stakeholders to affect regulations that will control enormous amounts of bank capital.
Regulatory uncertainty created by delays in FRTB Implementation
The delay in implementing FRTB by the Commission until January 1, 2027, is indicative of issues with coordinating regulations across the global landscape. Although all Basel III commitments have been implemented in the EU on January 1, 2025, with only a maximum extension for market risk, it should be noted that the necessary implementation by other prominent regions has been delayed or diverged largely from the original Basel Committee regulations.
This delay is indicative of the complex scenario that exists in international regulation of banks, where issues concerning competition can repeatedly conflict with prudent criteria. The European regulators are faced with the challenging situation of ensuring financial stability in their regions without placing their banks at a disadvantage compared to their global competitors. The high degree of competition in their trading activities makes it a top priority for Commission policymakers.
Main FRTB implementation timeline
- Original Basel III deadline: January 1, 2025
- EU postponement decision: Maximum extension granted
- New implementation date: January 1, 2027
- Deadline for consultation: January 6, 2026
Basel Committee’s criteria work towards global standardization
The Commission’s consultation is focused on policy options which could be implemented by means of delegated acts, providing particular solutions to lessen negative effects related to the net worth implications affecting EU banks for a transition period lasting for three years up until 2029. This would allow financial entities in Europe to move forward with implementing regulations related to FRTB while decreasing implementation costs until all other nations have adopted similar regulations. The proposed scheme includes two principal elements to systematically solve issues related to implementation.
The first part is concerned with adjusting framework areas in which other significant Member States have already deviated or will deviate in their final implementation. This is to ensure that EU banks are not put in a disadvantaged position compared with international competitors in similar markets due to stronger demands. The second element includes introducing a ‘multiplier’ to mitigate effects on banks that could be adversely impacted by FRTB norms.
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Multiplier design needs extensive participation by stakeholders
The Commission broadly encourages stakeholder feedback on multiplier design, stressing that this risk management tool must be simple, risk-sensitive, and easy to implement, maintain, and supervise. The proposed consultation is a critical opportunity for banks, supervisors, and other stakeholders in financial markets to ultimately help shape market risk regulation in Europe.
Due to the intricate nature of FRTB and the overall possible effects on banking activities, stakeholder engagement will likely play a critical role in finding pragmatic approaches for implementing these regulations. The collaborative model adopted by the Commission above implies that it is conscious about involving expertise in regulation.
Today’s consultation is a critical moment in European banking regulation, where technical issues meet implementation realities. The Commission’s readiness to engage stakeholders while upholding regulatory integrity is indicative of a mature regulatory culture for supervision in finance that can inform future developments in regulation for global financial service industries.