22 November 2016

EBA publishes final standards on assessment methodology to validate market risk models

In particular, these final European Banking Authority’s (EBA) draft RTS provide objective criteria to be applied in the assessment of the significance of those positions included in the scope of the internal model and state two different methodologies for general and specific risk categories, both of them based on the standardised rules for market risk.

In addition, the final draft RTS set out the standards for the assessment by Competent Authorities of an institution's compliance with IMA requirements when the institution applies to use an internal model to determine market risk capital requirements or introduces any material changes or extensions to the IMA approach already in use. They will also assist Competent Authorities in assessing whether an institution meets minimum IMA requirements on an ongoing basis following the regular review of its internal model. Consequently, these RTS will need to be embedded by supervisory authorities in their day-to-day practices.

When finalising the RTS, the EBA has been mindful of developments at international level in market risk capital standards. In particular it considered the Fundamental Review of the Trading Book (FRTB) that the Basel Committee on Banking Supervision (BCBS) published in January 2016. These RTS introduce some elements that go in the direction of the Basel review but, at the same time, can be implemented within the CRR current legal setting.

To avoid any unnecessary burden, the EBA has dropped some elements, originally included in the consultation paper that will no longer be relevant once the new market risk framework has been implemented in the EU.

Press release

Final draft RTS

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