09 Jun EBA started a consultation on RTS on capital requirements of non-modellable risks under the FRTB
June 04, 2020 –The European Banking Authority (EBA) initiated a consultation on draft Regulatory Technical Standards (RTS) on the capitalisation of non-modellable risk factors (NMRFs) for institutions using the new Internal Model Approach (IMA) under the FRTB (Fundamental Review of the Trading Book).
One of the key elements of the FRTB is the classification of risk factors that are included in the risk measurement model of the bank as modellable or non-modellable. According to the RTS, institutions must calculate a separate stress scenario risk measure for each non-modellable risk factor (or non-modellable bucket). This has to be calibrated to be at least as prudent as the expected shortfall calibration used for modelled risks (i.e. a loss calibrated to a 97.5% confidence threshold over a period of extreme stress for the given risk factor or the given bucket).
These draft RTS specify two approaches, that may be used by institutions for determining an extreme scenario of future shock. Therefore, two versions of the draft RTS are included in the consultation. Only one of the two will be kept after the consultation ends.
The first over-arching approach (Option A) requires institutions to identify a stress period for each broad risk factor category and to collect data for non-modellable risk factors on the stress period in order to determine an extreme scenario of future shock.
The second over-arching approach (Option B) recognises that, for non-modellable risk factors, data availability in a period of stress might be limited and requires institutions to collect data on non-modellable risk factors on the current period. This approach aims at improving the quality of the data that is used to calibrate the extreme scenarios of future shocks. In accordance with this approach, the extreme scenario of a future shock for a non-modellable risk factor is determined by rescaling shocks calibrated on data observed in the current period.
Comments to this consultation can be sent to the EBA until 4 September 2020.
For more information, please visit: EBA website.