US Banks Navigate Shifting FRTB Landscape: Eight Dealers May Avoid Full Implementation

The implementation of the Fundamental Review of the Trading Book (FRTB), a key component of the Basel III endgame, is undergoing adjustments that could significantly reduce the number of US banks required to fully comply. Recent proposals from the Federal Reserve suggest that eight US dealers may be exempt from the most stringent market risk capital calculations, potentially narrowing the scope of the framework.

Revised Thresholds and Impact on Compliance

Under current regulations, US lenders with trading assets and liabilities exceeding $1 billion, or representing 10% or more of total assets, are obligated to calculate market risk-weighted assets (RWAs) using Basel 2.5 standards. However, the proposed revisions to these thresholds, as reported by Risk.net on March 25, 2026, could exempt several institutions.

The FRTB and its Objectives

Born from lessons learned during the 2007-2009 financial crisis, FRTB aims to standardize and improve the calculation of risk-based capital requirements for trading activities. As Risk.net details, the framework offers two primary approaches: the Standardised Approach (SA) and the Internal Models Approach (IMA). The SA utilizes a formulaic route, while the IMA allows banks to employ their own, regulator-approved risk models.

Shift Away from Internal Models

Interestingly, a growing trend among US banks is a move away from the IMA towards the SA. This isn’t necessarily a sign of resistance, but rather a pragmatic response to a complex regulatory environment and the simplification of trading books. Many trading operations have become “remarkably plain vanilla,” diminishing the benefits of sophisticated internal modeling, according to industry experts cited in Risk.net’s coverage.

Factors Driving the Shift

• Cost of Maintenance: Maintaining and validating sophisticated internal models is expensive and requires constant regulatory scrutiny.
• Regulatory Overhaul: Regulations like the Comprehensive Capital Analysis and Review (CCAR) and Dodd-Frank Act Stress Tests (DFAST) have already prompted banks to streamline operations.
• Simplified Trading Books: The increasing prevalence of simpler trading strategies reduces the need for complex modeling.

Implications for US Banks

The potential exemption of eight US dealers from full FRTB implementation highlights a strategic recalibration within the industry. Banks are weighing the costs and benefits of maintaining complex internal models against the capital requirements of the standardized approach. SS&C Tech notes that this reshuffling of model methodologies raises new questions for US banks as they seek to align with the experiences of their counterparts in Europe and beyond.

Looking Ahead

As the Basel III endgame nears, US banks are actively assessing their FRTB implementation strategies. The decision to adopt the SA or IMA will depend on a variety of factors, including the complexity of their trading portfolios, the cost of model maintenance, and their overall risk appetite. The evolving regulatory landscape necessitates a flexible and informed approach to ensure compliance and optimize capital allocation.