PRA published an update to the temporary approach to value-at-risk (VAR) back-testing exceptions to mitigate the possibility of excessively pro-cyclical market risk capital requirements amid pandemic. In light of the amendments to the Capital Requirements Regulation (CRR) in response to the COVID-19 outbreak (the CRR Quick Fix), PRA has decided to terminate its temporary approach to VAR back-testing exceptions from September 30, 2020. From October 01, 2020 onward, firms should no longer apply any commensurate reduction in risks-not-in-VAR (RNIV) capital requirements.
On March 30, 2020, PRA had published a statement on the temporary approach on VAR back-testing exceptions. PRA had set out that the exceptional levels of market volatility during the ongoing COVID-19 event have led to an elevated level of VAR back-testing exceptions across the industry. To mitigate the possibility of excessively pro-cyclical market risk capital requirements through the automatic application of a higher VAR multiplier, PRA will allow firms—on a temporary basis—to offset increases due to new exceptions through a commensurate reduction in RNIV capital requirements. PRA had also advised that it would conduct a review of the temporary approach that allows firms to offset increases due to new back-testing exceptions through a commensurate reduction in RNIV capital requirements. Consequent to this review, PRA has decided to terminate its temporary approach to VAR back-testing exceptions from September 30, 2020. For back-testing exceptions that occur between January 01, 2020 and December 31, 2021 that do not result from deficiencies in the internal model, firms should now apply to PRA, in accordance with CRR Article 500c, to exclude those exceptions from the calculation of their back-testing addend.
Keywords: Europe, UK, Banking, COVID-19, Market Risk, Value-at-Risk, Regulatory Capital, CRR, Internal Models, Basel, PRA
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