EBA Issues Final Draft Standards on Internal Model Approach Under FRTB
EBA published the final draft regulatory technical standards on the new internal model approach under the Fundamental Review of the Trading Book (FRTB). These technical standards, which have been stipulated under the revised Capital Requirements Regulation (CRR2), conclude the first phase of EBA roadmap toward the implementation of the market and counterparty credit risk frameworks in EU. Within this announcement, EBA also acknowledged and welcomed the decision by the Group of Central Bank Governors and Heads of Supervision (GHOS) to defer the implementation date of the revised market risk framework by one year to January 01, 2023, which will allow EU banks to benefit from a longer implementation time.
These recently published technical standards specify essential aspects of the internal model approach under FRTB and represent an important contribution to a smooth and harmonized implementation of FRTB in EU. Under CRR2, the adoption of these regulatory technical standards is expected to trigger a three-year period after which institutions with the permission to use the FRTB internal models are required, for reporting purposes only, to calculate their own funds requirements for market risk with those internal models. Thus, in light of the current situation linked to COVID-19, these regulatory technical standards will not impose a burden on the industry. On the contrary, EBA trusts that providing early information to all market participants about key aspects for the EU implementation of the FRTB framework will be beneficial to ensure a smooth and harmonized process. The final draft technical standards cover 11 mandates and have been grouped in three different documents:
- The final draft regulatory technical standards on liquidity horizons for the internal model approach clarify how institutions are expected to map the risk factors to the relevant category and subcategory, along with specifications with respect to the list of currencies and currency pairs that can be mapped to a ten-day liquidity horizon under the interest rate and the foreign-exchange risk category. The standards also provide a definition of large and small capitalization reflecting the specificities of the EU equity market.
- The final draft regulatory technical standards on back-testing and P&L attribution requirements specify the elements to be included for the purpose of the tests in the hypothetical, actual, and risk-theoretical P&L (HPL, APL, and RTPL respectively). Furthermore, they set all key elements characterizing the P&L attribution requirements: the tests ensuring that HPL and RTPL are sufficiently close, the consequences for institutions with desks where those changes are not close, and the frequency at which the assessment of the P&L attribution requirement has to be performed. These standards also set the aggregation formula that institutions are expected to use for aggregating the own funds requirements.
- The final draft regulatory technical standards on criteria for assessing the modelability of risk factors under the internal model approach set out the criteria for identifying the risk factors that are modelable and that institutions are, therefore, allowed to include in their expected shortfall calculations. The modelability assessment is intended to ensure that only risk factors that are sufficiently liquid and observable are included into expected shortfall calculations so that reliable risk measures are calculated. The technical standards also set the frequency under which the modelability assessment should be performed by institutions.
Related Links
- Press Release
- Final Draft Standards on Liquidity Horizons (PDF)
- Final Draft Standards on Back-Testing and P&L Attribution (PDF)
- Final Draft Standards on Risk Factor Modelability (PDF)
- EBA Roadmap (PDF)
Keywords: Europe, EU, Banking, Securities, Market Risk, CRR2, Data Collection, COVID-19, Regulatory Technical Standards, FRTB, Internal Model Approach, Counterparty Credit Risk, Credit Risk, Basel III, 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
Previous Article
ECB Amends Guideline on Euro Short-Term RateRelated Articles
EBA Proposes Standards for IRRBB Reporting Under Basel Framework
The European Banking Authority (EBA) proposed implementing technical standards on the interest rate risk in the banking book (IRRBB) reporting requirements, with the comment period ending on May 02, 2023.
FED Issues Further Details on Pilot Climate Scenario Analysis Exercise
The U.S. Federal Reserve Board (FED) set out details of the pilot climate scenario analysis exercise to be conducted among the six largest U.S. bank holding companies.
US Agencies Issue Several Regulatory and Reporting Updates
The Board of Governors of the Federal Reserve System (FED) adopted the final rule on Adjustable Interest Rate (LIBOR) Act.
ECB Issues Multiple Reports and Regulatory Updates for Banks
The European Central Bank (ECB) published an updated list of supervised entities, a report on the supervision of less significant institutions (LSIs), a statement on macro-prudential policy.
HKMA Keeps List of D-SIBs Unchanged, Makes Other Announcements
The Hong Kong Monetary Authority (HKMA) published a circular on the prudential treatment of crypto-asset exposures, an update on the status of transition to new interest rate benchmarks.
EU Issues FAQs on Taxonomy Regulation, Rules Under CRD, FICOD and SFDR
The European Commission (EC) adopted the standards addressing supervisory reporting of risk concentrations and intra-group transactions, benchmarking of internal approaches, and authorization of credit institutions.
CBIRC Revises Measures on Corporate Governance Supervision
The China Banking and Insurance Regulatory Commission (CBIRC) issued rules to manage the risk of off-balance sheet business of commercial banks and rules on corporate governance of financial institutions.
HKMA Publications Address Sustainability Issues in Financial Sector
The Hong Kong Monetary Authority (HKMA) made announcements to address sustainability issues in the financial sector.
EBA Updates Address Basel and NPL Requirements for Banks
The European Banking Authority (EBA) published regulatory standards on identification of a group of connected clients (GCC) as well as updated the lists of identified financial conglomerates.
ESMA Publishes 2022 ESEF XBRL Taxonomy and Conformance Suite
The General Board of the European Systemic Risk Board (ESRB), at its December meeting, issued an updated risk assessment via the quarterly risk dashboard and held discussions on key policy priorities to address the systemic risks in the European Union.
