Managing bank risk in a fragmented regulatory environment

KEY TAKEAWAYS

How can banks, treasurers, and risk managers navigate increasingly fragmented global regulations? This article explores the challenges of Basel III and FRTB compliance across jurisdictions and shows how Bloomberg tools, such as MARS together with Regulatory Data Solutions, enable financial institutions to centralize data, model capital requirements, and manage regulatory risk efficiently.

The global financial crisis triggered massive regulatory changes as governments and transnational rule-making bodies struggled to manage the risks. Today, as different jurisdictions adopt varying reforms and roll out different measures, multinational entities operate in a complex, multi-jurisdictional regulatory environment. Within a large, global organization, different business units may face varying obligations, which continue to evolve as new regulations reshape how risk is managed at banks.

Against this backdrop, we look at regulations such as Fundamental Review of the Trading Book (FRTB) implemented as part of the Basel III reforms, and how risk managers and bank treasurers can better prepare for shifting global capital rules through consistent data practices, centralized analytics, and scalable tools that support compliance across multiple jurisdictions, helping maintain capital adequacy and regulatory data consistency.

The impact of diverging timelines on capital management

“After the global financial crisis, there was a push to enhance regulatory risk models to focus on risk in a crisis. Instead of just measuring value at risk, regulators asked banks as part of Basel 2.5 to measure stressed value at risk,” says Eugene Stern, Bloomberg’s Product Manager for MARS Market Risk and FRTB. 

More comprehensively, Basel III and FRTB attacked the problem by adding more stringent requirements for both standardized and internal risk models, while the U.S. relied more on intensive regulatory stress testing. Notably, in the US, overlap in the risks measured by the two methodologies led some risks to be capitalized twice, increasing capital requirements. 

Timing also created problems, as some markets, such as Japan, Canada, and Switzerland, were quick to adopt Basel III and FRTB requirements, while others, including the U.S., have significantly lagged. As a result, risk managers must consider not just the existing regulatory framework, but how it may evolve as more jurisdictions adopt new capital requirements.

As a result, multinational organizations may face multiple reporting requirements—one for their home market and others for jurisdictions where they operate subsidiaries. Examples of different treatments across jurisdictions include more stringent look-through requirements in Japan, different risk weights to account for credit quality of local instruments in Brazil, and the elimination of external ratings from the framework (required by Dodd-Frank) in the US. A large part of Stern’s job is ensuring that Bloomberg’s FRTB tools comply with each jurisdiction’s specific version of the Basel rules.

“These jurisdictional differences directly influence how we design and maintain our FRTB Data Solutions to meet client needs. We actively engage in early dialogue with regulators and industry bodies as local rules evolve, sharing observations, helping market participants assess potential impacts, and anticipating the adjustments required as each jurisdiction implements its version of the framework.” adds Kate Lee, Bloomberg’s Global Head of Regulatory Data

Risk managers can follow two basic forms of best practice to navigate a fragmented regulatory environment, according to Stern. “The first step is to have a really sound representation of what you’re holding, so that all the assets your organization’s trades are accounted for clearly in a single data set,” Stern explains.

“Then you need a strong analytics and data backbone to apply a common set of risk calculations with different inputs for each jurisdiction.”

Most of the larger multinational banks and trading organizations build these capabilities internally, Stern adds, but they may need to plug gaps, either geographically in smaller markets or by product. For instance, many U.S. banks have heavy holdings in U.S. mortgage-backed securities, particularly agencies, and both U.S. and non-U.S. companies may need help modeling risk in this sector.

Bloomberg’s FRTB solutions can fill these gaps for larger organizations, providing an overall solution for mid-sized and smaller ones through MARS Market Risk, part of its Multi-Asset Risk System (MARS), a comprehensive suite of risk management tools, and the firm’s FRTB Data Solution. 

“MARS centralizes holdings information in one central place. It runs a common Bloomberg analytics library, enriched with Bloomberg data, to calculate risk sensitivities. And, it calculates market risk capital based on the applicable regulatory requirements in each jurisdiction,” says Stern. “You can use it for a part of your organization or for the whole trading book.”

In addition, Bloomberg’s FRTB Data Solution supplies banks with data for standardised bucketing and to support Default Risk Charge (DRC) calculation, reference datasets, fund and index data to assist both look-through (LT) and non-LT approaches, historical data for stress testing and extensive pricing data across exchange traded OTC instruments. All these components are delivered as a consistent enterprise feed via Bloomberg Data License, ensuring that multiple functions across the bank rely on the same data. Data License content is easily accessible through SFTP or REST API, and is also available natively in all major cloud providers.

How fragmented regulations challenge bank treasury operations

Bank treasury professionals face a distinct set of challenges in a complex and fragmented regulatory environment. 

“In the treasury space, regulators, supervisors, and central banks set a lot more operational constraints than those coming from Basel,” says Mark Lewis, Product Management Corporate & Bank Treasury Specialist. “In addition to capital rules, these include market structure and even monetary policy. So while Basel implementation differs less across jurisdictions for the treasury space than for the trading book space, the other components lead to a large amount of fragmentation.” 

For bank treasurers, regulatory frameworks are fragmented by jurisdiction, with some national regulators introducing stricter rules and higher capital buffers than are required by Basel standards, and implementation taking place on varying timelines. 

But bank treasury departments may also be affected by regulations beyond the Basel framework, including requirements implemented by central banks, securities regulators, and tax resolution authorities. Finally, these divergent regulatory frameworks can interact, as a regulation designed for one purpose often has unintended consequences on another area of the treasury.

This multilayered fragmentation can have a significant impact on the bank’s treasury, resulting in increased costs and inefficiencies, suboptimal balance sheet management, and substantial hurdles to innovation.

How banks future-proof their risk management capabilities

The regulatory environment continues to shift, as more jurisdictions adopt and refine new rules around managing market risk. Yet sound data management, robust analytics, and a flexible capital architecture can make it faster and easier to react to changing requirements. 

Stern points to the Fed’s most recent hypothetical portfolio exercise, in which the Fed asked US banks in scope for Basel III to calculate FRTB capital for a set of standard portfolios just a few months after the publication of the first draft of the US-specific rule. “A number of those banks are our clients, so they asked us to  help them with this exercise,” said Stern. “Since we had that robust infrastructure of data, analytics, and customizable capital model configuration, we were able to get it done on time and relatively easily.” 

Bloomberg supports financial institutions with integrated data, analytics, and regulatory tools that streamline Basel III and FRTB compliance. MARS together with Regulatory Data Solution, risk and bank treasury teams can centralize data, model capital requirements, and manage risk consistently across markets.

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