The European Commission has launched a critical consultation that could reshape how banks manage market risk across the continent. This targeted review focuses on the Fundamental Review of the Trading Book framework, a sophisticated Basel III component that’s been delayed while other major jurisdictions struggle with implementation. The consultation runs until January 6, 2026, giving stakeholders just two months to influence rules that will govern billions in banking capital requirements.
The FRTB regulation has impacted bank capital adequacy requirements
The Fundamental Review of the Trading Book is a big step forward in terms of banking regulation and includes innovative approaches to risk measurement that are more aligned with market realities. Contrary to past approaches to regulation, FRTB employs complex models to reflect true hazards that banks are actually exposed to in trading activity. Such regulation ensures that banks maintain adequate levels of capital reserve on the basis of true risks taken by these banks.
The Commission later delayed the implementation date for FRTB to January 1, 2027, exercising the longest delay permitted by the CRRC. Indeed, this delay is necessary due to delays in implementation or divergence from the original Basel framework by other significant global regulators. This is due to intense competition between banks in their trade business operations, such that the maintenance of a level playing field is a matter of high concern for European supervisors.
Basel III norms guarantee the international banking systems
The Basel III regulations have been developed by the Basel Committee on Banking Supervision; these regulations ensure that banks have adequate capital levels, face financial stress, and have correct liquidity risk levels. All Basel III regulations, except for FRTB, have been in effect since January 1, 2025, thus showing the EU’s eagerness to implement international regulations on time.
The consultation is centered on addressing adverse effects on capital
The Commission’s consultation is focused on policy options that can be used through delegated acts, which provide particular alternatives to minimize negative effects on EU banks in terms of capital for a period of three years until 2029. This will ensure that banks can progress on the implementation of FRTB regulations without increasing implementation costs while ensuring a balance between competitiveness until other nations have similar regulations. The policy options proposed have two components.
The first part centers on adjusting framework areas based on where other big nations have deviated or will deviate in their final implementation. This is for EU banks not to be adversely impacted by more stringent regulations than their global rivals. The second component involves introducing a specific ‘multiplier’ in terms of adjusting for any negative effects on banks due to regulation by FRTB.
Key consultation elements:
- Policy alternatives for the transition period of three years
- Adjustments: Consistent with international deviations
- Targeted multiplier for capital impact neutralization
- Stakeholders’ views on multiplier design
- Timeline for implementation until 2029
Multiplier design needs stakeholder participation to be effective
The Commission particularly welcomes stakeholder opinions on multiplier design and stresses that this adjustment formula should be simple, risk-sensitive, and easy to implement, monitor, and supervise.ย The consultation is a significant opportunity for banks, supervisors, and all stakeholders to play a part in influencing market risk regulation in Europe. Given the level of complexity entailed by current FRTB provisions and their effect on banks’ activities, it is imperative for stakeholders to guide workable approaches.
The Commission’s stance on market risk regulation clearly indicates awareness about harmonizing regulation with collaboration and workability.ย This consultation is a critical point in European banking regulation, where both technological complexity and real-world implementation issues meet. That such a consultation is sought by a Commission eager to engage stakeholders but mindful of regulatory integrity is a sign of mature regulation that would be well worth replicating in future developments in financial services regulation.