US Agencies Ease Requirement for Market Risk Amid COVID Volatility
US Agencies (FED and OCC) issued response to a public question on increase in the number of backtesting exceptions and the associated capital implications under the market risk capital rule (12 CFR 3, subpart F) in light of the current market conditions. The joint response notes that the agencies took supervisory action in March 2020 and April 2020, giving certain banks the option to apply the multiplication factor that applied as of December 31, 2019, rather than applying a higher multiplier based on the most recent exceptions.
The market risk capital rule requires that a banking organization identify, once each quarter, the number of business days for which the actual daily net trading loss, if any, exceeds the corresponding daily value-at-risk (VaR) based measure exceptions that have occurred over the preceding 250 business days. A banking organization must then apply a multiplication factor that corresponds to the number of exceptions to determine its VaR-based and stressed VaR-based capital requirements for market risk, unless the banking organization’s primary federal banking regulator notifies the banking organization in writing that a different adjustment or another action is appropriate.
Additional time may be required to evaluate the root cause of recent backtesting exceptions, which otherwise could result in a capital requirement for market risk that is not commensurate with the firm’s covered positions. When determining whether a different adjustment to a banking organization’s VaR-based and stressed VaR-based capital requirements for market risk is appropriate, the primary federal banking regulator generally considers whether a regime shift has occurred. During March and April of 2020, consistent with section 204(b)(2) of the market risk capital rule, affected banking organizations were notified that they may apply the multiplication factor that applied as of December 31, 2019, to determine VaR-based capital requirements for market risk and stressed VaR-based capital requirement for market risk through September 30, 2020, as a result of the impact of COVID-19 on financial markets.
Related Links
Keywords: Americas, US, Banking, COVID-19, Market Risk, Regulatory Capital, Backtesting Exception, Value-at-Risk, Pillar 3, Disclosure, Basel, US Agencies
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
EU Agencies Update LCR Rule and Macro-Prudential Policy Recommendation
The European Commission (EC) published the Delegated Regulation 2022/786 with regard to the liquidity coverage requirements for credit institutions under the Capital Requirements Regulation (CRR).
EBA Publishes Regulatory Standards to Identify Shadow Banking Entities
The European Banking Authority (EBA) published the final draft regulatory technical standards specifying the criteria to identify shadow banking entities for the purposes of reporting large exposures.
OSFI Discusses Benchmark Rate Transition, Sets Out Work Priorities
The Office of the Superintendent of Financial Institutions (OSFI) published the strategic plan for 2022-2025 and the departmental plan for 2022-23.
EBA Proposes Standards to Support Secondary NPL Markets
The European Banking Authority (EBA) is consulting, until August 31, 2022, on the draft implementing technical standards specifying requirements for the information that sellers of non-performing loans (NPLs) shall provide to prospective buyers.
EU Confirms Agreement on Rules on Cybersecurity and Banking Resolution
The European Council and the Parliament reached an agreement on the revised Directive on security of network and information systems (NIS2 Directive).
EBA Issues Standards for Crowdfunding Service Providers Under ECSPR
The European Banking Authority (EBA) published the final draft regulatory technical standards specifying information that crowdfunding service providers shall provide to investors on the calculation of credit scores and prices of crowdfunding offers.
EU to Amend Credit Risk Adjustment Rules; ESAs Submit Queries on SFDR
The European Council published a draft Commission Delegated Regulation to amend the regulatory technical standards on specification of the calculation of specific and general credit risk adjustments.
EU Confirms Agreement on Rules on Cybersecurity and Banking Resolution
The European Securities and Markets Authority (ESMA) published a paper that examines the systemic risk posed by increasing use of cloud services, along with the potential policy options to mitigate this risk.
MAS Amends Notice 635 and Issues Second Proposal on Green Taxonomy
The Monetary Authority of Singapore (MAS) published amendments to Notice 635, which sets out requirements that a bank in Singapore has to comply with when granting an unsecured non-card credit facility to individuals.
EC Consults on PSD2 and Open Finance; EU Reaches Agreement on DORA
The European Commission (EC) published a public consultation on the review of revised payment services directive (PSD2) and open finance.
