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.
Keywords: Americas, US, Banking, COVID-19, Market Risk, Regulatory Capital, Backtesting Exception, Value-at-Risk, Pillar 3, Disclosure, Basel, US Agencies
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