On November 12, 2020, ISDA submitted a response to a consultation by the European Banking Authority (EBA) on criteria for the use of data inputs in the risk-measurement model.
The Fundamental Review of the Trading Book alternative internal model is introduced through the second Capital Requirements Regulation, where the approach presents specific features aimed at enhancing the reliability of an institution’s capacity for appropriately capturing risks through internal models. The alternative internal model approach is designed to capture market risks and take into account tail risks, risk of market illiquidity and default risk through the sum of three components: i) the expected shortfall risk measure, which determines capital requirements for those risk factors for which a sufficient amount of observable data is available (modellable risk factors); ii) the stress scenario risk measure for risk factors with limited observable data (non-modellable risk factors); and iii) the own funds requirement for default risk associated with credit and equity positions. The guidelines propose qualitative conditions that the data related to modellable risk factors should meet to be used in an institution’s expected shortfall calculations.
The industry appreciates the EBA’s efforts to develop guidelines to align industry standards on data inputs used in firms’ risk measurement models. However, there are concerns about the prescriptive nature of the regulatory technical standards – in particular, on the allowance of appropriate extrapolation techniques and how this could lead to a level-playing-field issue if European banks have a different set of modelling options compared to banks in other jurisdictions.
Share This Article:Share Consultation Response on Data Inputs in the Risk Measurement Modelon Facebook. May trigger a new window or tab to open. Share Consultation Response on Data Inputs in the Risk Measurement Modelon Twitter. May trigger a new window or tab to open. Share Consultation Response on Data Inputs in the Risk Measurement Modelon LinkedIn. May trigger a new window or tab to open. Share Consultation Response on Data Inputs in the Risk Measurement Modelvia email. May trigger a new window or your email client to open.