The European Commission has launched a targeted consultation that may have an impact on the management of market risk by banks in Europe over the coming decade. The consultation was opened on November 6, and it aims to gather input on the Framework on the Fundamental Review of the Trading Book, known by the acronym FRTB. This process goes beyond an update and aims at the problem posed by the delay in the implementation process and the uneven field that it poses.
Resolving the issue of implementation timing in the international
The consultation addresses the issue arising from the latest developments, where there are issues in the alignment of implementation timescales for the implementation of the Basel standards in different jurisdictions. The latest developments in the United Kingdom on the implementation of the Basel standards and the possible re-proposal in the United States in the first quarter of 2026 have led to issues concerning the competitiveness imbalance on a worldwide basis.
The Commission has postponed the implementation of the market risk measures by two years, the maximum extension permitted under the existing CRR powers. This timing disparity raises questions concerning the maintenance of a level playing field in EU financial markets and institutions. The consultation invites input on the policy choices that could provide targeted adjustments to counter adverse capital effects on EU banks over three years. The Commission acknowledges that uncoordinated implementation may create a competitive disadvantage for financial institutions in Europe.
Stakeholder feedback sought on two-component policy framework
The consultation focuses on two key aspects that try and strike a balance between the implementation difficulties and the need to maintain integrity. The first aspect would utilize the Article 461a CRR powers of empowerment in making framework changes related to areas where other authorities have diverged, signaling their intention to diverge in the future. These proposed changes include attribution in profits and losses, implementation terms related to non-modellable components, and operationally in alternative internal models.
The second variable would imply the inclusion of a multiplier on overall market risk capital, whereby banks that are facing negative effects could utilize it in order to mitigate the increase in the capital requirements over a period of three years. The other models on the bank-specific multipliers include the use of the bank-specific multipliers on a basis that needs constant recalibration in terms of the Basel 2.5 capital.
Implementation strategy balances competitiveness with regulatory standards
The Commission’s stance has achieved a delicate equilibrium between the need to safeguard the competitiveness of the EU banking system and the need to ensure the integrity of the framework and the aims of financial stability. The proposed measures are intended to counter the impact on the market risk capital charges triggered by the implementation of the FRTB. The measures provide relief in the short term, ensuring that, in the long term, the treatment is in line with the internationally imposed obligations.
The consultation exercise appears to be an astute reaction to the dynamic changes in the external regulatory environment, with the EU institutions cognizant of the fact that strict observation of the originally intended timelines may prove adverse in the longer run. The consultation exercise carried out by the Commission on the methodology and implementation plans appears to be appropriate for evidence-based policy-making.
The consultation on the latest framework updates in the concept of market risk by the European Commission represents an important milestone in EU banking regulations, where the need to remain globally competitive has had to be synchronized with the need to remain committed to proper risk management. With the January deadline nearing, the response will inform EU banking on the way forward in dealing with the changes in the concept of market risk beyond 2027.
