UK banks face mounting pressure from FRTB uncertainty

The implementation of the Fundamental Review of the Trading Book (FRTB) and the broader Basel 3.1 framework is proving to be one of the most complex and drawn-out regulatory transformations in recent memory.

According to the Head of Prudential Regulation at a leading UK bank, the United Kingdom now finds itself in a delicate position – wedged between the decisiveness of the European Central Bank and the uncertainty of the United States. 

“The fundamental dilemma for UK banks is the lack of clarity and synchronisation across global regulatory frameworks,” he told a recent CeFPro conference event.

On the continent, the European Union has set out a relatively coherent pathway for FRTB, though with limited uptake of the Internal Models Approach. 

The U.S., by contrast, has retreated from full implementation, with momentum slowed by political pressures and lobbying. 

This divergence, the expert explained, has left the UK Prudential Regulation Authority hesitant, delaying its own progress in cautious alignment with the U.S.

For banks, FRTB has become a case study in how the practical burdens of implementation often outweigh theoretical ambition. 

Years into the process, few firms have adopted the Internal Models Approach, discouraged by high costs, limited capital benefits due to output floors and heavy operational demands. Most have defaulted to the Standardised Approach. 

“The danger here is systemic model risk,” the senior executive said. “When everyone uses the same assumptions, distortions and herding behaviours are inevitable.”

The human cost is also underappreciated. Banks have poured resources into recruiting top quantitative talent, but the diminished role of internal modelling under Basel 3.1 risks demotivating these teams. 

Many firms are now running dual models – one for regulatory capital requirements, another for internal risk management.