Featured Product

    PRA Explains Approach to CCR Calculation Under Internal Models Method

    March 30, 2020

    PRA published a statement that sets out its approach to calculate exposure for counterparty credit risk, or CCR, under the internal models method (IMM). It published another statement that sets out its approach for the Value-at-Risk (VAR) back-testing, with this temporary approach being relevant for firms experiencing an elevated level of VAR back-testing exceptions. Both these statements have been published in light of the COVID-19 outbreak.

    Statement on exposure value for counterparty risk under IMM

    The Capital Requirements Regulation (CRR) does not preclude firms using the IMM to measure the exposure value, including collateral which has not yet settled at the time of calculation. Where a shortfall between the collateral for which a firm has called and the collateral which has settled arises as a result of the ordinary collateral settlement cycle, including this shortfall in the calculation of exposure may lead to unwarranted volatility in the exposure value and therefore unwarranted volatility in risk-weighted assets. Firms with permission under CRR Article 285 are required to capture the effects of margining within the calculation of Effective Expected Positive Exposure, which is derived from the profile of estimated Expected Exposure. PRA considers that firms are not required to estimate the initial Expected Exposure recognizing only collateral that has settled at the time of calculation. According to PRA, a firm which calculates the initial Expected Exposure on the basis of collateral that has not yet settled would be expected to monitor the impact of this modeling choice on an ongoing basis and hold capital against any understatement of economic risk. Firms would not be expected to recognize collateral in the initial Expected Exposure which has been called for but disputed by the counterparty.

    If a firm makes a change to any IMM model as a result of this guidance then this would constitute a post-approval model change requiring post-notification as per Section 6.16 of PRA Supervisory Statement SS12/13, unless the impact of that change exceeded the materiality threshold as set out in Section 6.10(b) of the statement, in which case it would require pre-notification as set out in Section 6.15.

    Statement on temporary approach to VAR back-testing exceptions

    PRA mentioned that the exceptional levels of market volatility over the past few weeks 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 risks-not-in-VAR (RNIV) capital requirements. The statement notes that the baseline number of back-testing exceptions to be used, which will determine the point at which the RNIV reduction starts, should be agreed with PRA at the outset. Firms are expected to continue to monitor and analyze exceptions during this temporary period and, when the situation returns to normal (that is, after the end of the temporary period), PRA will consider which (if any) of the exceptions can reasonably be discounted (per section 6 of PRA supervisory statement on market risk). This approach will be reviewed by PRA after six months—that, is in September 2020. 


    Related Links

    Keywords: Europe, UK, Banking, Value-at-Risk, COVID-19, CRR, Counterparty Credit Risk, Back-Testing, Risk-Weighted Assets, Regulatory Capital, Internal Models, PRA

    Featured Experts
    Related Articles

    BIS Paper Studies Impact of Fintech Lending on Small Businesses in US

    The Bank for International Settlements (BIS) published a paper that studies impact of fintech lending on credit access for small businesses in U.S.

    September 26, 2022 WebPage Regulatory News

    UK Regulators Issue CRR Changes and Stress Test Scenarios for Banks

    The Prudential Regulation Authority (PRA) issued the policy statement PS8/22 to amend the Own Funds and Eligible Liabilities (CRR) Part of the PRA Rulebook and update the supervisory statement SS7/13 titled "Definition of capital (CRR firms).

    September 26, 2022 WebPage Regulatory News

    EBA Launches EU-Wide Transparency Exercise in 2022

    The European Banking Authority (EBA) launched the EU-wide transparency exercise for 2022, with results of the exercise expected to be published at the beginning of December, along with the annual Risk Assessment Report.

    September 23, 2022 WebPage Regulatory News

    SRB on CRR Quick-Fix to Policy for Multiple Point of Entry Banks

    The Single Resolution Board (SRB) welcomed the adoption of the review of the Capital Requirements Regulation, or CRR, also known as the "CRR quick-fix."

    September 22, 2022 WebPage Regulatory News

    EC Rule Lists Advanced Economies for Market Risk Capital Calculations

    The European Commission (EC) recently adopted the Delegated Regulation 2022/1622, which sets out the regulatory technical standards to specify the countries that constitute advanced economies for the purpose of specifying risk-weights for the sensitivities to equity.

    September 21, 2022 WebPage Regulatory News

    EBA Publishes Final Regulatory Standards on STS Securitizations

    The European Banking Authority (EBA) published the final draft regulatory technical standards specifying and, where relevant, calibrating the minimum performance-related triggers for simple.

    September 20, 2022 WebPage Regulatory News

    ECB Further Reviews Costs and Benefits Associated with IReF

    The European Central Bank (ECB) is undertaking the integrated reporting framework (IReF) project to integrate statistical requirements for banks into a standardized reporting framework that would be applicable across the euro area and adopted by authorities in other EU member states.

    September 15, 2022 WebPage Regulatory News

    EBA Publishes Funding Plans Report, Receives EMAS Certification

    The European Banking Authority (EBA) has been awarded the top European Standard for its environmental performance under the European Eco-Management and Audit Scheme (EMAS).

    September 15, 2022 WebPage Regulatory News

    MAS Launches SaaS Solution to Simplify Listed Entity ESG Disclosures

    The Monetary Authority of Singapore (MAS) set out the Financial Services Industry Transformation Map 2025 and, in collaboration with the SGX Group, launched ESGenome.

    September 15, 2022 WebPage Regulatory News

    BCBS to Finalize Crypto Rules by End-2022; US to Propose Basel 3 Rules

    The Basel Committee on Banking Supervision met, shortly after a gathering of the Group of Central Bank Governors and Heads of Supervision (GHOS), the oversight body of BCBS.

    September 15, 2022 WebPage Regulatory News
    RESULTS 1 - 10 OF 8521