As the published timelines for banks to comply with the Fundamental Review of the Trading Book (FRTB) draw closer, it has been observed that banks are reducing their use of the internal models approach (IMA) for market risk across jurisdictions.

Many banks that are or were on the IMA under Basel 2.5 plan to transition entirely to the standardized approach under the FRTB. Furthermore, those banks transitioning from the IMA under Basel 2.5 to the IMA under the FRTB only plan to do so for a very limited portion of the trading book (15-40% under the FRTB compared to an average of 85% under Basel 2.5).

The move away from the IMA appears to be a relatively recent trend. When the FRTB rules were first issued for consultation in 2012, most banks on the IMA under Basel 2.5 intended to transition to the IMA under the FRTB on a like-for-like basis in terms of their trading book coverage. However, as the rules evolved and banks assessed the cost and impact of implementing and operationalizing the IMA, many have scaled back their ambitions and, in many cases, chosen to transition completely to the SA. Banks that are retaining internal models plan to prioritize the IMA only for selected trading desks where the choice of IMA desk coverage is dependent on the bank’s corresponding business activities and infrastructure readiness.

This whitepaper analyzes the drivers for low IMA adoption across the industry. The themes and views presented are based on discussions with executive sponsors across 26 global trading banks. The paper also reflects banks’ perspectives on the key advantages of the IMA, alongside their views on the steps that could be taken to incentivize greater IMA adoption.

Click on the attached PDF to read the paper.