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
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
ACPR to Replace SURFI Taxonomy With RUBA Taxonomy from January 2022Related Articles
BIS and Central Banks Experiment with GenAI to Assess Climate Risks
A recent report from the Bank for International Settlements (BIS) Innovation Hub details Project Gaia, a collaboration between the BIS Innovation Hub Eurosystem Center and certain central banks in Europe
Nearly 25% G-SIBs Commit to Adopting TNFD Nature-Related Disclosures
Nature-related risks are increasing in severity and frequency, affecting businesses, capital providers, financial systems, and economies.
Singapore to Mandate Climate Disclosures from FY2025
Singapore recently took a significant step toward turning climate ambition into action, with the introduction of mandatory climate-related disclosures for listed and large non-listed companies
SEC Finalizes Climate-Related Disclosures Rule
The U.S. Securities and Exchange Commission (SEC) has finalized the long-awaited rule that mandates climate-related disclosures for domestic and foreign publicly listed companies in the U.S.
EBA Proposes Standards Related to Standardized Credit Risk Approach
The European Banking Authority (EBA) has been taking significant steps toward implementing the Basel III framework and strengthening the regulatory framework for credit institutions in the EU
US Regulators Release Stress Test Scenarios for Banks
The U.S. regulators recently released baseline and severely adverse scenarios, along with other details, for stress testing the banks in 2024. The relevant U.S. banking regulators are the Federal Reserve Bank (FED), the Federal Deposit Insurance Corporation (FDIC), and the Office of the Comptroller of the Currency (OCC).
Asian Governments Aim for Interoperability in AI Governance Frameworks
The regulatory landscape for artificial intelligence (AI), including the generative kind, is evolving rapidly, with governments and regulators aiming to address the challenges and opportunities presented by this transformative technology.
EBA Proposes Operational Risk Standards Under Final Basel III Package
The European Union (EU) has been working on the final elements of Basel III standards, with endorsement of the Banking Package and the publication of the European Banking Authority (EBA) roadmap on Basel III implementation in December 2023.
EFRAG Proposes XBRL Taxonomy and Standard for Listed SMEs Under ESRS
The European Financial Reporting Advisory Group (EFRAG), which plays a crucial role in shaping corporate reporting standards in European Union (EU), is seeking comments, until May 21, 2024, on the Exposure Draft ESRS for listed SMEs.
ECB to Expand Climate Change Work in 2024-2025
Banking regulators worldwide are increasingly focusing on addressing, monitoring, and supervising the institutions' exposure to climate and environmental risks.
