EBA Raising The Bar For Market Risk Models

The EBA published draft Regulatory Technical Standards (RTS) on the assessment and approval of internal models for market risk on 14 December 2015. The new document sets out far more detail on market risk model requirements than is currently contained in the Capital Requirements Regulation (CRR) or the PRA Rulebook and Supervisory Statements.

In particular, the paper proposes some significant changes and additions to the standards expected of banks in their market risk model applications:

• The EBA is proposing that market risk model applications should cover 90 to 95% of all trading book positions. This is a significantly greater scope than many of the market risk models currently used by banks and brokerage firms (e.g. many existing CAD 1 and VaR models currently fall far short of this threshold).