PRA Consults on Stressed VaR and RNIV Calculations Under Market Risk
PRA is proposing, via the consultation paper CP15/20, to update its expectations on the measurement of risks not in value at risk (RNIV) and on the meaning of "period of significant financial stress relevant to the institution’s portfolio" for the stressed value at risk (sVaR) calculation. In light of the issues exposed by the COVID-19 event, PRA is proposing to set expectations that are intended to attenuate the procyclicality in own funds requirements for market risk. To this end, PRA has proposed amendments to the supervisory statement SS13/13 on market risk and the proposed changes would take effect from the publication date of the final policy. The consultation paper closes on November 06, 2020 and is relevant for all firms to which the Capital Requirements Directive (CRD) IV applies.
PRA has identified that, due to the significant market volatility related to the COVID-19 outbreak, RNIV own funds requirements calculated at a single point in time (for example, at quarter-end) can increase suddenly and unexpectedly, where a sudden increase in market volatility occurs close to quarter-end. Therefore, PRA is proposing that RNIV own funds requirements should be calculated at quarter-end, as an average across the preceding twelve-week period of an RNIV measure calculated at least weekly. PRA is also proposing that, for the risk factors for which a firm calculates an RNIV measure less frequently than weekly, the firm should notify PRA and be able to justify on an ongoing basis the reasons for not performing that calculation at least weekly.
Additionally, the PRA sets out proposals related to sVaR with the intent to improve consistency in the identification of the "period of significant financial stress relevant to the institution’s portfolio" across firms, ensure that firms consider a sufficiently broad observation period, and minimize overlaps between the VaR and sVaR measures. At present, Article 365(2) of the Capital Requirements Regulation (CRR) requires a firm using market risk internal models to calculate a sVaR that is calibrated to a "period of significant financial stress relevant to the institution’s portfolio." However, market volatility related to the COVID-19 outbreak has posed an additional question about the potential overlap between VaR and sVaR measures. Therefore, PRA is proposing the following:
- For identifying a "period of significant financial stress relevant to the institution’s portfolio" for sVaR, firms should consider an observation period that starts at least from January 01, 2007. The observation period generally does not need to include the most recent 12 months of historical data immediately preceding the point of calculation.
- Firms may include the most recent 12 months in their observation period, where it leads to a more appropriately prudent outcome.
- Where a firm believes that the observation period for determining the sVaR stress period should exclude more than the most recent 12 months, the firm should contact PRA and set out and provide justification for its rationale.
The proposals set out in CP15/20 have been designed in the context of withdrawal of UK from EU and entry into the transition period, during which time UK remains subject to European law. PRA will keep the policy under review to assess whether any changes would be required due to changes in the UK regulatory framework at the end of the transition period, including those arising once any new arrangements with EU take effect. PRA has assessed that the proposals would not need to be amended under the EU (Withdrawal) Act 2018.
Related Links
Comment Due Date: November 06, 2020
Effective Date: Final Policy Publication Date (Proposed)
Keywords: Europe, UK, Banking, COVID-19, Market Risk, RNIV, Value-at-Risk, CRD IV, CRR, Basel, CP15/20, SS13/13, PRA
Featured Experts

María Cañamero
Skilled market researcher; growth strategist; successful go-to-market campaign developer

Victor Calanog, Ph.D.
Leading economist; commercial real estate; performance forecasting, econometric infrastructure; data modeling; credit risk modeling; portfolio assessment; custom commercial real estate analysis; thought leader.

Pierre-Etienne Chabanel
Brings expertise in technology and software solutions around banking regulation, whether deployed on-premises or in the cloud.
Related Articles
ESAs Publish Reporting Templates for Financial Conglomerates
ESAs published the final draft implementing technical standards on reporting of intra-group transactions and risk concentration of financial conglomerates subject to the supplementary supervision in EU.
EBA Publishes Report on Asset Encumbrance of Banks in EU
EBA published the annual report on asset encumbrance of banks in EU.
US Agencies Publish Updates for Call Reports, FFIEC 101, and FR Y-9C
FED updated the reporting form and instructions for the FR Y-9C report on consolidated financial statements for holding companies.
EBA Proposes Guidelines for Establishing Intermediate Parent Entities
EBA issued a consultation paper on the guidelines on monitoring of the threshold and other procedural aspects of the establishment of intermediate EU parent undertakings, or IPUs, as laid down in the Capital Requirements Directive.
EC Adopts Financial Reporting Changes Arising from Benchmark Reforms
EC published Regulation 2021/25 that addresses amendments related to the financial reporting consequences of replacement of the existing interest rate benchmarks with alternative reference rates.
BIS Bulletin Examines Key Elements of Policy Response to Cyber Risk
BIS published a bulletin, or a note, that examines the cyber threat landscape in the context of the pandemic and discusses policies to reduce risks to financial stability.
HMT Updates List of Post-Brexit Equivalence Decisions in UK
HM Treasury, also known as HMT, has updated the table containing the list of the equivalence decisions that came into effect in UK at the end of the transition period of its withdrawal from EU.
EBA Issues Erratum for Technical Package on Reporting Framework 3.0
EBA published an erratum for technical package on phase 1 of the reporting framework 3.0.
APRA Publishes FAQ on Measurement of Credit Risk Weighted Assets
APRA updated a frequently asked question (FAQ), for authorized deposit-taking institutions, on the measurement of credit risk weighted assets.
ECB Letter Sets Out Strategies to Address Issue of Nonperforming Loans
ECB published a letter from Andrea Enria, the Chair of the Supervisory Board of ECB, answering questions raised by the President of the Bundestag (the German federal parliament) on how ECB assesses the financial stability of the euro area in the context of the significant level of nonperforming loans.