Introduction
Market risk, a fundamental component of Pillar I risks, has undergone significant transformations during the Basel IV revisions. Notably, Counterparty Credit Risk and Credit Valuation Adjustment (CVA) have been incorporated within the scope of market risk.
Additionally, ALM Risk, specifically Interest Rate Risk in the Banking Book (IRRBB) and liquidity risks, are classified as structural balance sheet risks. Although not categorised under Pillar I, these risks are critical for financial institutions and have been identified as supervisory priorities by the ECB for the next two years. These areas will continue to be under close scrutiny, reflecting their importance in the overall risk management framework.
Challenges
- Data Integrity and Management
- Methodology and Modelling techniques
- Governance and Compliance
Data Integrity and Management
Banks are navigating significant changes in internal methodologies and standard approaches within market risk, necessitating a high quality of data to accurately assess these risks.
Structural balance sheet risks such as IRRBB and liquidity demands both intensive and high-quality data to ensure precise risk measurement. This requirement has been underscored by the 2023 banking turmoil in the US and Switzerland, highlighting its critical importance.
Furthermore, the processes involved in data collection, validation, and loading are notably time-consuming and resource intensive. These processes require meticulous attention to detail to ensure data granularity, availability, and timeliness, which are essential for accurate risk calculation.
Methodology and Modelling techniques
The adoption of the Fundamental Review of the Trading Book (FRTB) has significantly reshaped market risk management, complicating both the internal model and standard approach to risk measurement. This change demands more sophisticated methodologies and an increased effort in modelling risk parameters and factors.
For structural risks, maintaining robust methodologies that comply with regulatory guidelines is critical. Additionally, banks must employ advanced modelling techniques to accurately represent the behaviours of their balance sheets and to develop scenarios that effectively identify potential risks. This ensures banks are prepared and resilient in their risk management strategies.
Governance and Compliance
The implementation of the FRTB framework has heightened governance requirements, necessitating enhanced oversight of positions within the trading book, updates to market risk policies, and internal risk transfers between the banking and trading books. It also requires organizational changes in the activities of trading desks.
In terms of compliance, the role of the third line of defence, internal audit, is strengthened. This function is now tasked with more rigorous supervision and must produce periodic reports on various aspects of the trading book for regulatory review, ensuring transparency and accountability in trading operations.
How we can help
PwC has supported numerous banks in various Trading & Market Risk related projects.
As a leading consulting firm, we can work closely with your organisation to deliver high-quality outcomes across all aspects of Trading & Market Risk. We can also advise on value-adding initiatives, identify areas requiring enhancements, and support clients on ensuring compliance with regulatory requirements.
We can assist you with the following topics:
Contact us
Pablo Suarez Manjon
Trading and Market Risk Workstream Lead, Director, PwC Spain
Tel: +34 6764 89076
