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The European Central Bank (ECB) has postponed the implementation of the Fundamental Review of the Trading Book (FRTB) framework for one year, with the new go-live now scheduled for January 2027. This deferral applies to both the Alternative Standardised Approach (ASA) and the Alternative Internal Model Approach (AIMA), and brings the European timeline in line with that of the United States and the United Kingdom.
While anticipated, this delay offers European banks a strategic window to reinforce their risk frameworks, solidify technology investments, and reassess their approach—particularly regarding internal models, which many institutions have deprioritized in recent years.
Why is interest in AIMA continuing to decline?
This question has been circulating widely, with many wondering whether this could reprieve , combined with a more pragmatic regulatory tone, revive momentum for internal models in the coming years. Although all institutions benefit from this delay, it is especially crucial for the few still pursuing AIMA approval. Currently, only BNP Paribas, Deutsche Bank, and Intesa Sanpaolo remain actively engaged in the pocess.
On paper, AIMA is the most accurate approach to align capital requirements with the actual risk profile of trading desks. In contrast, ASA relies on standardized formulas that tend to be conservative and less risk sensitive. However, the high operational burden, regulatory complexity, and long-term resource commitments have led most banks to favour ASA as a more pragmatic, industrialized solution.
The challenge of gaining AIMA approval
One of the most significant barriers to adopting AIMA lies is the granularity of its approval process. Rather than been granted access at the institutional level, access is determined desk by desk, with each desk needing to meet stringent eligibility criteria and secure supervisory validation. Adding to the complexity, approval is not permanent. It can be revoked at any time if a desk fails to meet ongoing compliance requirements – forcing a fallback to ASA with immediate capital implications. This regulatory fragility creates structural uncertainty, complicating long-term investments in risk architecture, models, and skilled talent.
Eligibility for AIMA – PLAT, backtesting, and the ES Ratio
AIMA eligibility hinges on passing the Profit and Loss Attribution Test (PLAT), which compares the desk's actual P&L to that generated by its internal models. The goal is to ensure that all relevant risk factors are properly captured. While this requirement has pushed banks to enhance model accuracy and reduce oversimplification, it has also introduced a paradox: highly controlled desks may fail due to residual risks that models struggle to reflect. Failure to pass PLAT jeopardizes the desk’s access to AIMA.
Backtesting adds another level of scrutiny. A significant number of breaches can result in capital penalties or a withdrawal of model approval. Further complexity comes from Article 325bc(2)(a) of CRR2, which requires the 60-day average of the PES(RC)/PES(FC) ratio to exceed 75%. Falling below this threshold triggers the loss of model eligibility. Taken together, these layers of scrutiny reflect a regulatory environment that is both technically demanding and inherently unstable.
In practice, only a handful of carefully selected trading desks will initially be allowed to adopt AIMA. But this overly restrictive score creates a structural issue: with limited diversification, the approach’s ability to deliver meaningful capital benefits is severely undermined.
Opportunity cost of AIMA approval
Even when a desk successfully obtains AIMA approval, the expected benefits may be less significant than anticipated. One key limitation stems from Non-Modellable Risk Factors (NMRFs), which exclude any risk factors lacking sufficiently frequent observable prices. These are omitted from the expected shortfall calculation and instead subjected to conservative stress testing – diluting the capital relief that AIMA is designed to deliver.
Additionally, the approval brings with it complex COREP reporting requirements, demanding granular breakdowns, rigorous calculations, and close coordination across risk, finance, and IT functions. For many institutions, this represents a significant operational burden.
Finally the Basel III output floor which introduces a floor set at 72.5% of total RWAs computed under standardised approaches, for market but also credit and operational risks. This caps the potential capital savings from internal models, regardless of their level of accuracy compared to standard methods.
Together, these factors underscore the opportunity cost of pursuing AIMA, prompting many banks to question whether the payoff justifies the effort. These constraints, revocable eligibility, high costs, and capped capital benefits, have led more institutions to abandon the AIMA route altogether. Instead, most now focus on ensuring robust compliance with ASA, which is seen as less costly, more predictable from a supervisory standpoint, and easier to industrialize.
A regulatory shift in the making
The ECB’s decision to delay AIMA implementation has sparked speculation that regulators maybe softening their stance. There’s a growing sense that supervisory bodies are becoming more receptive to the operational challenges banks face on the ground.
Several potential areas are being discussed:
- More flexible interpretations of eligibility tests like PLAT and NMRF criteria
- Extended compliance timelines
- Simplified validation procedures
- Streamlined FRTB COREP templates
If these changes materialize, they could help reduce the gap between the effort required and the actual benefits delivered – making AIMA a more practical and appealing option for banks that have so far held back.
The path ahead
The FRTB regulatory framework remains in a state of flux. While ASA is currently the default approach across Europe, the deferral of AIMA and a renewed regulatory dialogue could reshape strategic priorities in the months ahead.
This moment presents an opportunity for banks to reassess the value of internal models, optimize their existing ASA implementations, and deepen engagement with supervisory authorities to stay ahead of evolving expectations.
Capco: Your FRTB Implementation Partner
In this complex and evolving environment, Capco supports European banks across their FRTB journey – whether they choose ASA, AIMA, or both. With a blend of regulatory insight and operational know-how, Capco helps clients define a clear roadmap, prioritize technology investments, and achieve compliance without sacrificing performance. As the regulatory landscape continues to evolve, having the right partner can make all the difference in turning uncertainty into strategic advantage.