PRA Issues Update on Temporary Approach to VAR Back-Testing Exceptions
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.
Related Links
Keywords: Europe, UK, Banking, COVID-19, Market Risk, Value-at-Risk, Regulatory Capital, CRR, Internal Models, Basel, PRA
Featured Experts
María Cañamero
Skilled market researcher; growth strategist; successful go-to-market campaign developer
Nicolas Degruson
Works with financial institutions, regulatory experts, business analysts, product managers, and software engineers to drive regulatory solutions across the globe.
Patrycja Oleksza
Applies proficiency and knowledge to regulatory capital and reporting analysis and coordinates business and product strategies in the banking technology area
Related Articles
APRA Issues Interim Update to Policy Priorities for 2021 and Beyond
In a letter addressed to the industry, the Australian Prudential Regulation Authority (APRA) set out an updated schedule of policy priorities for the banking, insurance, and superannuation industries.
EC Adopts Solvency II and Resolution Rules Package for Insurers
The European Commission (EC) adopted a comprehensive review package of Solvency II rules in the European Union.
OCC Issues Booklets on Regulatory Reporting and Earnings
The Office of the Comptroller of the Currency (OCC) issued Versions 1.0 of the "Earnings" and "Regulatory Reporting" booklets of the Comptroller's Handbook.
ECB Sets Out Results of Economy-Wide Climate Stress Tests
The European Central Bank (ECB) published results of its economy-wide climate stress test, which aimed to assess the resilience of non-financial corporates and euro area banks to climate risks.
EBA Examines Implications of Increasing Use of Digital Platforms in EU
The European Banking Authority (EBA) published a report on the use of digital platforms in the banking and payments sector in European Union.
HKMA Issues Updates on Policy Measures Intended to Ease COVID Impact
The Hong Kong Monetary Authority (HKMA) published updates on the policy measures that were announced in context of the ongoing pandemic.
ISDA Responds to BCBS Proposal on Treatment of Cryptoasset Exposures
The International Swaps and Derivatives Association (ISDA), along with several other associations, submitted a joint response to the Basel Committee on Banking Supervision (BCBS) consultation on preliminary proposals for the prudential treatment of cryptoasset exposures.
BIS Quarterly Review Discusses Developments in Fintech and ESG Space
BIS published the September issue of the Quarterly Review, which contains special features that analyze the rapid rise in equity funding for financial technology firms, the effectiveness of policy measures in response to pandemic, and the evolution of international banking.
BCBS to Consult on Supervisory Practices for Climate Risks by Year-End
The Basel Committee for Banking Supervision (BCBS) met in September 2021 and reviewed climate-related financial risks, discussed impact of digitalization, and welcomed efforts by the International Financial Reporting Standards (IFRS) Foundation to develop a common set of sustainability reporting standards
OCC Identifies Operational Risk Deficiencies in MUFG Union Bank
The Office of the Comptroller of the Currency (OCC) issued a Cease and Desist Order against MUFG Union Bank for deficiencies in technology and operational risk governance.
