Featured Product

    EBA Finalizes Standards on Alternative SA for Market Risk

    October 25, 2021

    The European Banking Authority (EBA) published the final draft regulatory technical standards on gross jump-to-default amounts and on residual risk add-on under the Capital Requirements Regulation or CRR. One set of regulatory standards specifies how gross jump-to-default amounts are to be determined for calculating the default risk charge for non-securitization instruments while the other set specifies how to identify instruments exposed to residual risks for the residual risk add-on. These standards provide technical specifications for the implementation of the aforementioned two elements of the alternative standardized approach for market risk. The draft regulatory standards are a part of the phase 3 deliverables of the EBA roadmap for the new market and counterparty credit risk approaches.

    Institutions using the alternative standardized approach for market risk are required to compute three separate own funds requirements for market risk—namely, the sensitivities-based method (SbM) requirements, the residual risk add-on, and the default risk charge. To determine the default risk charge under the alternative standardized approach for market risk under the CRR, the gross jump-to-default amount of exposures are to be calculated. The final draft regulatory technical standards on gross jump-to-default amounts specify how gross jump-to-default amounts are to be determined for institutions’ exposures in the trading book under the alternative standardized approach for market risk, in scope of the default risk charge for non-securitizations. These standards are intended to address the following three mandates set out in CRR:

    • How the components P&Llong, P&Lshort, Adjustmentlong, and Adjustmentshort are to be determined to calculate gross jump-to-default amounts of exposures to debt and equity instruments with the formulae in Article 325w(1), (2), and (5) of CRR
    • Which alternative methodologies institutions are to use for estimating gross jump-to-default amounts of exposures referred to in Article 325w(7) of CRR
    • How to determine the notional amount of instruments other than the ones referred to in Article 325w(4) of CRR

    The regulatory technical standards on residual risk add-on clarify the scope of residual risk add-on instruments for which the own funds capital requirements for residual risks should be determined. The standards specify a non-exhaustive list of instruments bearing residual risks and a list of risks that do not constitute residual risks. The standards also clarify that longevity risk, weather, natural disasters, and future realized volatility should all be considered as exotic underlyings. The residual risk add-on is intended to provide a simple and conservative capital treatment for any other risks not covered by the sensitivities-based method or the default risk charge. Therefore, instruments exposed to residual risks—that is, instruments referencing an exotic underlying or instruments bearing other residual risks—are subject to the residual risk add-on treatment. The residual risk add-on amounts to 1% or 0.1% of the gross notional amount of the instrument, depending on whether the instrument is an instrument referencing an exotic underlying or an instrument bearing other residual risks, respectively.

     

    Related Links

    Keywords: International, Asia Pacific, Banking, Securities, Central Banks, Asian Development Bank, Green Bond Fund, ESG, Sustainable Finance, BIS

    Featured Experts
    Related Articles
    News

    APRA Penalizes Heritage Bank for Incorrect Reporting of Capital

    The Australian Prudential Regulation Authority (APRA) found that Heritage Bank Limited had incorrectly reported capital because of weaknesses in operational risk and compliance frameworks, although the bank did not breach minimum prudential capital ratios at any point and remains well-capitalized.

    November 29, 2021 WebPage Regulatory News
    News

    OSFI Releases Annual Report 2021-2022

    The Office of the Superintendent of Financial Institutions (OSFI) released the annual report for 2020-2021.

    November 29, 2021 WebPage Regulatory News
    News

    APRA Finalizes Guidance on Management of Climate Change Risks

    The Australian Prudential Regulation Authority (APRA) released the final Prudential Practice Guide on management of climate change financial risks (CPG 229) for banks, insurers, and superannuation trustees.

    November 26, 2021 WebPage Regulatory News
    News

    EBA Publishes Single Rulebook Q&A Updates in November 2021

    The European Banking Authority (EBA) Single Rulebook Question and Answer (Q&A) tool updates for this month include answers to 10 questions.

    November 26, 2021 WebPage Regulatory News
    News

    EC Proposes New Measures Under Capital Markets Union Package

    The European Commission (EC) has adopted a package of measures related to the Capital Markets Union.

    November 25, 2021 WebPage Regulatory News
    News

    European Council Adopts Position on Digital Finance Package Proposals

    The European Council adopted its position on two proposals that are part of the digital finance package adopted by the European Commission in September 2020, with one of the proposals involving the regulation on markets in crypto-assets (MiCA) and the other involving the Digital Operational Resilience Act (DORA).

    November 25, 2021 WebPage Regulatory News
    News

    PRA Proposes Rulebook Changes; BoE Extends BEEDS Testing Window

    The Prudential Regulation Authority (PRA) is proposing, via the consultation paper CP21/21, to apply group provisions in the Operational Resilience Part of the PRA Rulebook (relevant for the Capital Requirements Regulation or CRR firms) to holding companies.

    November 25, 2021 WebPage Regulatory News
    News

    FED Outlines Lending Conditions and Supervisory Activities in H1 2021

    The Board of Governors of the Federal Reserve System (FED) published a report that summarizes banking conditions in the United States, along with the supervisory and regulatory activities of FED.

    November 24, 2021 WebPage Regulatory News
    News

    EBA Publishes Standards to Calculate Risk-Weights of CIUs Under CRR

    The European Banking Authority (EBA) published the final report on draft regulatory technical standards for the calculation of risk-weighted exposure amounts of collective investment undertakings or CIUs, in line with the Capital Requirements Regulation (CRR).

    November 24, 2021 WebPage Regulatory News
    News

    APRA Expects Boards to Strengthen Ability to Oversee Cyber Resilience

    The Australian Prudential Regulation Authority (APRA) recently completed two pilot initiatives in its 2020-2024 Cyber Security Strategy, which was published in November 2020.

    November 23, 2021 WebPage Regulatory News
    RESULTS 1 - 10 OF 7736