EBA Issues Guidelines Related to Internal Model Market Risk Approach
The European Banking Authority (EBA) published the final guidelines that set out requirements for data inputs used to determine the scenarios of future shocks applied to modellable risk factors. The guidelines clarify the conditions that data inputs for modellable risk factors should meet for their use in the expected shortfall calculations. Institutions using the alternative Internal Model Approach (IMA) for market risk are required to compute the expected shortfall risk measure for their modellable risk factors. The guidelines, which are part of the deliverables included in the roadmap for the new market and counterparty credit risk approaches, will be applicable from January 01, 2022.
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
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
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
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.
OSFI Releases Annual Report 2021-2022
The Office of the Superintendent of Financial Institutions (OSFI) released the annual report for 2020-2021.
APRA Finalizes Capital Adequacy Standards for Banks
The Australian Prudential Regulation Authority (APRA) published, along with a summary of its response to the consultation feedback, an information paper that summarizes the finalized capital framework that is in line with the internationally agreed Basel III requirements for banks.
CPMI-IOSCO Seek Comments on Access to Central Clearing and Portability
The Committee on Payments and Market Infrastructures (CPMI) and the International Organization of Securities Commissions (IOSCO) issued a consultative report focusing on access to central counterparty (CCP) clearing and client-position portability.
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.
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.
EC Finalizes Rules on Internal Approaches Benchmarking Exercise
The European Commission, or EC, finalized the Implementing Regulation 2021/2017 with respect to the benchmark portfolios, reporting templates, and reporting instructions for the supervisory benchmarking of internal approaches for calculating own funds requirements.
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.
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).
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.
