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The Fundamental Review of the Trading Book (FRTB) is the promised overhaul of bankmarket risk regulation. FRTB retains the authorized use of proprietary risk models, however, it introduces two additional criteria: (i) P&L attribution (PLA) tests and (ii) desk‐level backtests. We examine empirically whether these additional criteria influence risk management and portfolio management practice, specifically portfolio construction and choice of risk model. We find that the PLA tests demand significant alignment with risk factors, however, the backtests do not incentivize use of superior risk models. This has important implications for the efficacy of the capital‐based regulatory system.

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The central role of Value-at-Risk (VaR) within bank market risk regulation received significant criticism from financial media and government investigations into the events of the 2007–2009 financial crisis. Impending reform of bank market risk regulation under the Fundamental Review of the Trading Book (FRTB) demotes VaR, replacing it with a layered framework centred on expected shortfall (ES). However, many of these criticisms assume full integration of internal and regulatory market risk models and further, a linear relationship between risk models and regulatory capital. We examine bank practitioners’ perspectives and experienced realities to better understand the operational relationship between internal and regulatory market risk models, and between risk models and capital. This has important policy implications for the efficacy of the reforms to banking regulation, financial stability and navigating the dichotomy of private and public interests.