Every bank that trades bonds, equities, currencies, commodities, or derivatives has to answer one uncomfortable question every single day: how much capital do we need to set aside in case these trades go wrong? For more than a decade, the global answer to that question has been going through the largest overhaul in the history of market risk regulation — a framework known as FRTB, the Fundamental Review of the Trading Book.
If you work anywhere near a risk desk, a regulatory reporting team, or a Basel implementation project, you have heard the term used constantly, often without much explanation. This article is the first in our FRTB Standardised Approach series, and it exists to answer the basic questions before we get technical: what is FRTB, why did regulators feel the existing rules had to be rebuilt rather than patched, and how is the standard actually organised? Everything that follows in this series — the risk classes, the formulas, the worked examples — sits on top of the foundation this article lays.
The Cracks That Appeared During the 2008 Financial Crisis
Before the 2008 global financial crisis, banks calculated market risk capital primarily using Value-at-Risk (VaR) models, typically measured at a 99% confidence level over a 10-day horizon. On paper this looked rigorous. In practice, the crisis exposed three structural weaknesses that VaR-based capital could not handle.
- Procyclicality: VaR is backward-looking. During calm markets it stayed low, letting banks hold trading positions with very little capital behind them — right before volatility spiked and losses arrived all at once.
- The trading book vs banking book boundary was porous: the same instrument could sit in either book depending on a bank’s internal intent, and moving positions to whichever book carried a lower capital charge became a known form of regulatory arbitrage.
- Tail risk and credit-related losses in the trading book — particularly on securitised products — were not properly captured by a measure built around a 99%/10-day statistical window, understating exposure to exactly the kind of correlated, fat-tail losses that materialised in 2008.
The Basel Committee’s first response, introduced in 2009 and commonly referred to as Basel 2.5, added a stressed VaR measure and an incremental risk charge for default and credit migration risk. These were meaningful patches, but they were layered on top of the same underlying VaR architecture — they did not fix the structural boundary and procyclicality issues. Regulators increasingly concluded that market risk capital needed to be rebuilt, not repaired.
Note: This section provides general regulatory history for context. The 2008-crisis narrative and Basel 2.5 description are standard, publicly documented industry background and are not contained in the uploaded Basel Committee PDF, which begins its own narrative from the 2016 publication onward. Flagging this per our sourcing rule — let me know if you’d like this trimmed, expanded, or removed.
From Basel 2.5 to FRTB: The Regulatory Timeline
The Fundamental Review of the Trading Book began as a Basel Committee consultation process in the early 2010s and went through multiple rounds of industry feedback and recalibration before reaching the version this series is built on. The milestones below combine the general consultation history with the specific publication dates the source document itself cites in its introduction.
| Year | Milestone |
| 2009 | Basel 2.5 introduces stressed VaR and an incremental risk charge as an interim patch to the pre-crisis framework. |
| 2012 | Basel Committee launches the Fundamental Review of the Trading Book consultation process. |
| January 2016 | First full FRTB standard published — Minimum Capital Requirements for Market Risk (d352). |
| March 2018 | Targeted revisions proposed via a consultative document (d436), following industry QIS feedback. |
| January 2019 | Final, recalibrated standard published (d457) — the document this series is based on. |
| 1 January 2022 | FRTB becomes the effective Pillar 1 minimum capital requirement for market risk, replacing Basel II and its amendments. |
https://www.bis.org/bcbs/publ/d457.htm
What This Standard Actually Says About Itself
The document this series is based on describes itself plainly: it sets out the amended minimum capital requirements for market risk that serve as the Pillar 1 minimum requirement from 1 January 2022, replacing the market risk rules under Basel II and its subsequent amendments. It explicitly supersedes the January 2016 publication.
That modular format matters practically: every rule in the standard is tagged with a chapter code (like MAR21) and a paragraph number (like MAR21.1), which is why you will see citations in this style throughout the series. The chapters are organised as follows:
| Chapter Code | Chapter Name |
| RBC25 | Boundary between the banking book and the trading book |
| MAR10 | Market risk terminology |
| MAR11 | Definitions and application of market risk |
| MAR12 | Definition of a trading desk |
| MAR20–MAR23 | Standardised Approach (general provisions, sensitivities-based method, default risk capital, residual risk add-on) |
| MAR30–MAR33 | Internal Models Approach |
| MAR40 | Simplified Standardised Approach |
| MAR90 | Transitional arrangements |
| MAR99 | Guidance on use of the Internal Models Approach |
Three Ways to Calculate Market Risk Capital — and Why the Standardised Approach Matters to Everyone
FRTB gives banks three possible routes to calculate market risk capital, and this is where the framework becomes genuinely important to understand, not just for smaller banks but for the largest institutions in the world too.
- Simplified Standardised Approach (MAR40): a recalibrated version of the old Basel II approach, available only to banks that are not a G-SIB, do not use internal models for any trading desk, and hold no correlation trading positions — subject to supervisory approval.
- Standardised Approach (MAR20–MAR23): the sensitivities-based, formula-driven approach that is the subject of this entire series — built from risk-factor sensitivities, a default risk charge, and a residual risk add-on.
- Internal Models Approach (MAR30–MAR33): available only per trading desk, subject to strict supervisory approval, and built around Expected Shortfall rather than VaR.
Here is the detail most people miss: choosing the Internal Models Approach does not mean a bank stops calculating the Standardised Approach. The standard is explicit that all banks — except those approved to use the simplified alternative — must calculate capital requirements using the Standardised Approach. Banks approved for the Internal Models Approach must additionally calculate the Standardised Approach for every single trading desk, including desks that are eligible for internal models, treating each as a standalone portfolio with no cross-desk offsetting.
| Why the Standardised Approach Matters Even If a Bank Never Uses It Directly The source document requires the Standardised Approach to serve four specific purposes for Internal Models Approach banks: 1. It acts as the fallback capital requirement for any desk that fails the eligibility criteria for internal models. 2. It generates a consistent benchmark to compare modelled capital outcomes across banks and jurisdictions. 3. It lets regulators monitor the relative calibration of standardised versus modelled approaches over time. 4. It provides regulators with macroprudential insight in a consistent, comparable format. Separately, the Standardised Approach is always mandatory — regardless of a bank’s approach — for securitisation exposures and for certain equity investments in funds that cannot be looked through. |
Sourced from MAR11.7–MAR11.9 of the document.
Why This Series Focuses on the Standardised Approach
Given that every bank in the world touching market risk capital — from a mid-sized regional lender to a G-SIB running sophisticated internal models — has to calculate the Standardised Approach in some form, it is genuinely the universal language of FRTB. It is also where the framework’s real innovation lives: a structured, transparent, sensitivities-based methodology that replaced the opaque, model-dependent VaR world of Basel 2.5.
This series will build the Standardised Approach from the ground up. We will start with the trading book and banking book boundary (RBC25) and the framework’s core definitions (MAR10–MAR12), then move systematically through the Standardised Approach itself: its overall structure (MAR20), the sensitivities-based method across all seven risk classes — interest rate, credit spread, equity, commodity, and foreign exchange (MAR21) — the default risk capital requirement (MAR22), and the residual risk add-on (MAR23). We will close with a master reference article that ties every component into a single worked, end-to-end capital calculation.
In the next article, we start where the standard itself starts: the boundary between the trading book and the banking book, and why getting that classification right is the first and most consequential decision in the entire FRTB framework.
Frequently Asked Questions
What does FRTB stand for?
FRTB stands for the Fundamental Review of the Trading Book, the Basel Committee’s overhaul of market risk capital rules, finalised in its current form in January 2019 and effective from 1 January 2022.
Is the Standardised Approach only for smaller banks?
No. Even banks approved to use the Internal Models Approach must calculate the Standardised Approach for every trading desk, both as a mandatory fallback and as a supervisory benchmark, per MAR11.8 of the standard.
What replaced Value-at-Risk under FRTB?
Banks using the Internal Models Approach now calculate capital using Expected Shortfall rather than Value-at-Risk, covered later in this series. The Standardised Approach, our focus, uses a sensitivities-based method rather than either VaR or Expected Shortfall.
Which document is this series based on?
The Basel Committee on Banking Supervision’s Minimum Capital Requirements for Market Risk, published January 2019 and revised February 2019 (document reference d457), which superseded the January 2016 publication (d352).
https://decode-finance.com/category/market-risk-credit-risk-and-operational-risks