The Fundamental Review of the Trading Book (FRTB), is a set of proposals by the Basel Committee on Banking Supervision for a new market risk-related capital requirement for banks.
[1][2] The reform, which is part of Basel III, is one of the initiatives taken to strengthen the financial system, noting that the previous proposals (Basel II) did not prevent the financial crisis of 2007–2008.
[7] The FRTB revisions address deficiencies relating to the existing [8] Standardised approach and Internal models approach[9] and particularly revisit the following: FRTB additionally sets a "higher bar" for banks to use their own, internal models for calculating capital, as opposed to the standardised approach.
[2] Here, for a desk to qualify for the internal models approach, its model must pass two tests: a profit and loss attribution test and a backtest.
[citation needed] As for other Basel frameworks, the Standardised Approach is directly implementable, but, at the same time, carries more capital; whereas the Internal Models approach, by contrast, carries less capital, but the modelling is more complex.