EBA Issues Guidelines Related to Internal Model Market Risk Approach

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

• Press Release
• Guidelines (PDF)

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