The EBA publishes final standards for Supervisors assessing new market risk internal models

The European Banking Authority (EBA) today published its final draft Regulatory Technical Standards (RTS) on the assessment methodology under which competent authorities verify institutions’ compliance with the requirements applicable to their internal models under the Fundamental Review of the Trading Book (FRTB) rules. These RTS are part of the phase 4 deliverables of the EBA roadmap on market risk and counterparty credit risk approaches. Today’s final draft RTS represent a significant milestone in the implementation of the FRTB internal models in the EU.

The RTS provide clarity on the assessment performed by competent authorities when granting an internal model approval under the FRTB framework. In particular, they set out a framework for competent authorities to assess the FRTB requirements and focus on three central themes: governance, the internal risk-measurement model - covering the expected shortfall, and the stress scenario risk measure - and the internal default risk model.

The RTS include assessment techniques that the competent authorities must apply, while other techniques remain optional depending on the situation of the institution, for example, on the basis of proportionality considerations. As a result, these RTS provide clarity regarding the nature of requests institutions can expect to receive from competent authorities during the investigation phase.

Legal basis and background

These draft RTS have been developed according to Article 325az(8)(b) of Regulation (EU) No 575/2013 (Capital Requirements Regulation - CRR), which mandates the EBA to specify the assessment methodology under which competent authorities verify an institution's compliance with the requirements applicable to internal models.

One of the prerequisites for an institution to use the new internal model approach (IMA) for calculating its own funds requirements for market risk is the approval from its competent authority. To obtain such an approval, the institution is subject to a thorough and comprehensive assessment of its internal model by the competent authority to ensure it complies with the relevant regulatory provisions.