EBA Issues Guidelines Related to Internal Model Market Risk Approach
The European Banking Authority (EBA) published the final guidelines that set out requirements for data inputs used to determine the scenarios of future shocks applied to modellable risk factors. The guidelines clarify the conditions that data inputs for modellable risk factors should meet for their use in the expected shortfall calculations. Institutions using the alternative Internal Model Approach (IMA) for market risk are required to compute the expected shortfall risk measure for their modellable risk factors. The guidelines, which are part of the deliverables included in the roadmap for the new market and counterparty credit risk approaches, will be applicable from January 01, 2022.
The final guidelines set out criteria in relation to the accuracy, appropriateness, frequency of updates, and completeness of data inputs used by institutions for their modellable risk factors. The criteria aim to ensure the calibration of data inputs to historical data reflective of prices observed or quoted in the market, capture of general and specific risks, updates at appropriate frequency and whenever changes in market conditions require it, and replacement of any missing or inconsistent values in the data inputs, as needed. The data inputs used to determine the scenarios of future shocks applied to the modellable risk factors for the computation of the expected shortfall measure must, according to Article 325bc of the Capital requirements Regulation (CRR), be calibrated to historical data, from either the preceding 12-month period or a continuous 12-month period of financial stress. Institutions may use different sources or types of historical data for this purpose. Once a risk factor has been deemed modellable, an institution should verify that data inputs for the risk factor are accurate, appropriate, frequently updated and complete, based on the provisions included in these guidelines. The guidelines also include provisions to cover the following cases:
- Data inputs used in multifactor models (beta approximations) and other random data-generating approaches for the purpose of determining the scenarios of future shocks
- Data inputs used for combinations of risk factors
- Interpolation and extrapolation techniques used for replacing missing or inconsistent values in the data input
The revised Capital Requirements Regulation (revised CRR) implements, into EU legislation, the revised framework for minimum capital requirements for market risk, also known as the Fundamental Review of the Trading Book (FRTB), developed by the Basel Committee of Banking Supervision. One of the aspects introduced by the FRTB and included in the revised CRR is the alternative internal model approach, specifically revised to overcome the identified drawbacks in the Basel 2.5 internal model approach. The alternative internal model approach comprises three different components, one of which is the expected shortfall risk measure.
Related Links
Effective Date: January 01, 2022
Keywords: Europe, EU, Banking, Market Risk, CRR, CRR2, FRTB, Expected Shortfall, Counterparty Credit Risk, Basel, Regulatory Capital, Internal Models, EBA
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
BIS and Central Banks Experiment with GenAI to Assess Climate Risks
A recent report from the Bank for International Settlements (BIS) Innovation Hub details Project Gaia, a collaboration between the BIS Innovation Hub Eurosystem Center and certain central banks in Europe
Nearly 25% G-SIBs Commit to Adopting TNFD Nature-Related Disclosures
Nature-related risks are increasing in severity and frequency, affecting businesses, capital providers, financial systems, and economies.
Singapore to Mandate Climate Disclosures from FY2025
Singapore recently took a significant step toward turning climate ambition into action, with the introduction of mandatory climate-related disclosures for listed and large non-listed companies
SEC Finalizes Climate-Related Disclosures Rule
The U.S. Securities and Exchange Commission (SEC) has finalized the long-awaited rule that mandates climate-related disclosures for domestic and foreign publicly listed companies in the U.S.
EBA Proposes Standards Related to Standardized Credit Risk Approach
The European Banking Authority (EBA) has been taking significant steps toward implementing the Basel III framework and strengthening the regulatory framework for credit institutions in the EU
US Regulators Release Stress Test Scenarios for Banks
The U.S. regulators recently released baseline and severely adverse scenarios, along with other details, for stress testing the banks in 2024. The relevant U.S. banking regulators are the Federal Reserve Bank (FED), the Federal Deposit Insurance Corporation (FDIC), and the Office of the Comptroller of the Currency (OCC).
Asian Governments Aim for Interoperability in AI Governance Frameworks
The regulatory landscape for artificial intelligence (AI), including the generative kind, is evolving rapidly, with governments and regulators aiming to address the challenges and opportunities presented by this transformative technology.
EBA Proposes Operational Risk Standards Under Final Basel III Package
The European Union (EU) has been working on the final elements of Basel III standards, with endorsement of the Banking Package and the publication of the European Banking Authority (EBA) roadmap on Basel III implementation in December 2023.
EFRAG Proposes XBRL Taxonomy and Standard for Listed SMEs Under ESRS
The European Financial Reporting Advisory Group (EFRAG), which plays a crucial role in shaping corporate reporting standards in European Union (EU), is seeking comments, until May 21, 2024, on the Exposure Draft ESRS for listed SMEs.
ECB to Expand Climate Change Work in 2024-2025
Banking regulators worldwide are increasingly focusing on addressing, monitoring, and supervising the institutions' exposure to climate and environmental risks.
