02 February 2022
The European Banking Authority (EBA) published today its final draft Regulatory Technical Standards (RTS) on the list of countries with an advanced economy for calculating the equity risk under the alternative standardised approach (FRTB-SA). These RTS are part of the phase 3 deliverables of the EBA roadmap for the new market and counterparty credit risk approaches.
Institutions using the alternative standardised approach to determine own funds requirements for market risk are required to compute the equity risk stemming from their trading book positions in accordance with a prescribed set of risk factors and corresponding risk weights. To determine the appropriate risk-weight, institutions are to identify whether a risk factor refers to an advanced economy or an emerging market. Risk factors mapped to the advanced economy bucket benefit from a lower risk weight compared to those mapped to the emerging market bucket.
While not specifying the underlying criteria to draw it, the FRTB standards provide a list of advanced economies that leaves out some EU countries. The EBA, accordingly, analysed an extensive sample of equity names to assess whether equity names related to economies included in the FRTB list are less volatile than those relating to the excluded EU countries. The results show that this is not the case.
On the basis of the results obtained, and considering that the EU has a single market, the final draft RTS complement the FRTB list of advanced economies by including all member states and all countries belonging to the European Economic Area (EEA).
These draft RTS have been developed according to Article 325ap(3) of Regulation (EU) No 575/2013 (CRR), which mandates the EBA to specify what constitutes an emerging market and to specify what constitutes an advanced economy.