Notwithstanding another shock event, those challenges will involve preparing for more immediate known unknowns, such as further lockdown measures and credit problems, as well as for longer-standing issues, such as the planned phase-out of LIBOR by the end of the year.
On the macro level, economies across many countries may have declined by 5-10% in 2020, and should expect only a modest recovery in 2021. Although central banks continued to provide substantial support to rate markets (approximately $5.6tn in 2020) as the global Covid-19 pandemic continued, firms still needed to manage their cash flows, and some reports suggest that credit weakness will continue into 2021. The ECB’s recent “Dear CEO” letter, for example, requires large banks to report their plans to address the rapidly evolving credit risks.
Born out of the 2008 credit crisis, FRTB, although not fully implemented, has already started to bear fruit, as banks were much better prepared and better capitalized in 2020 than they were in 2008. Nevertheless, implementation remains a challenge, with banks in different places regarding their compliance efforts. The sheer enormity and specificity of details required for the regulation can be overwhelming and arguably represents the principle difficulty of the framework. Although the global COVID-19 pandemic prompted a one-year global delay for FRTB from the regulatory side, most banks got back up and