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

22 November 2016

The European Banking Authority (EBA) published today its final draft Regulatory Technical Standards (RTS) that specify the conditions under which Competent Authorities assess the significance of positions included in the scope of market risk internal models, as well as the methodology they shall apply when assessing an institution's compliance with the requirements to use an Internal Model Approach (IMA) for market risk. These draft RTS are a key component of the EBA's work to ensure consistency in models' outputs and comparability of risk-weighted exposures and will contribute to harmonise the supervisory assessment methodology across all EU Member States and, ultimately, to restore confidence in the use of such models for regulatory purposes. 
In particular, these final 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.

Legal basis and background 

Under the IMA, institutions determine their own funds requirements for market risk based on internally developed models. Competent Authorities may, according to Article 363 of Regulation (EU) No 575/2013 (Capital Requirements Regulation – CRR) permit institutions to use the IMA for one or several of the risk categories listed in paragraph 1 of that Article, provided that the conditions set out in in Part Three, Title IV, Chapter 5 of the CRR are met.
These final draft RTS have been developed according to points (b) and (c) of Article 363(4) of the Capital Requirements Regulation (CRR), which mandates.  the EBA to specify the criteria applied to assess what is a ‘significant share' of the positions to be included in an internal model, computed for each one of the market risk categories referred to in paragraph 1 of that Article. The EBA already completed the mandate to draft RTS specifying the conditions for assessing the materiality of extensions and changes to use market internal models, included in point (a) of Article 363(4). 


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