What is expected shortfall FRTB?

Expected shortfall is a measure of the average of all potential losses exceeding VaR at a given confidence interval. The main reason for the transition is that VaR does not capture risks beyond the 99th percentile and so fails to capture, and disincentivise tail risk.

What is FRTB regulation?

The Fundamental Review of the Trading Book is an international standard that sets out rules governing capital banks must hold against market risk exposures. Banks can either use their own internal models or a standardised approach to calculate capital under FRTB.

Is Basel 4 a FRTB?

Fundamental review of the trading book (FRTB), or Basel IV, has been in development for a long time and introduces a paradigm shift in the market risk regulatory framework as it imposes a complete overhaul of market risk capital rules across the globe.

What is the difference between expected shortfall and VaR?

VAR gives a 100\% weighting to the Xth quantile and zero to other quantiles. Expected shortfall gives equal weight to all quantiles greater than the Xth quantile and zero weight to all quantiles below the Xth quantile.

What is RNIV?

Risks not in VaR (RNIV) is a concept introduced by the UK Financial Conduct Authority in 2010 to account for risks not captured in a VaR model. For banks that have adopted the RNIV framework, RNIV represent a material proportion of their Internal Models Approach (IMA) capital.

Is FRTB part of crr2?

The European Commission has adopted the FRTB framework in the CRR II, that according to the Basel Committee has a final status since January 2016.

What is FRTB reporting?

The Fundamental Review of the Trading Book (FRTB) affects your capital calculations and has big impact on your risk monitoring framework. To monitor their risk profiles they will require flexibility, granular data drilldown to the trade level, and an ability to create bespoke stress-test scenarios.

Why is FRTB needed?

FRTB rules require banks to strengthen their existing market risk infrastructure and overall technology capabilities, with additional computational capacity to support calculations as required under new capital requirements.

How do you calculate 5\% expected shortfall?

Expected shortfall is calculated by averaging all of the returns in the distribution that are worse than the VAR of the portfolio at a given level of confidence. For instance, for a 95\% confidence level, the expected shortfall is calculated by taking the average of returns in the worst 5\% of cases.

How to calculate stressed expected shortfall under FRTB rules?

Under FRTB rules, stressed expected shortfall is to be calculated at 97.5 th percentile for each trading desk for the market risk capital calculation purposes. Following steps are to be followed:

How to calculate market risk under FRTB?

There are two prescribed approaches to calculate market risk under FRTB. These two approaches are known as the internal models approach (IMA) and standardised approach (SA). Please ensure you read this regulatory FRTB document to understand the requirements in depth and always consider the official regulatory documents as the source of truth.

How is the expected shortfall calculated?

Following steps are to be followed: Expected shortfall, referred as ES R,S, is calculated for the most severe twelve month stressed period on a regulator approved reduced set of risk factors. Expected shortfall, referred as ES R,C, is calculated for the reduced set of risk factor on a most recent twelve month period;

What is the FRTB method based on?

The method is based on the calculation of the stressed expected shortfall for a trading desk. This post will provide details on the method prescribed under FRTB rules without spending too much time on the mathematical details of the expected shortfall measure. What is Expected Shortfall?