EBA: Guidelines on Stressed Value-At-Risk (Stressed VaR) and on the Incremental Default and Migration Risk Charge (IRC)

16 May 2012

The European Banking Authority published two sets of Guidelines, one on Stressed Value-At-Risk (Stressed VaR), and one on the Incremental Default and Migration Risk Charge (IRC) modelling approaches employed by credit institutions using the Internal Model Approach (IMA).

These Guidelines are seen as an important means of addressing weaknesses in the regulatory capital framework and in the risk management of financial institutions. Their objective is to contribute to a level playing field and to enhance convergence of supervisory practices across the EU.

National competent authorities are expected to implement the provisions set out in the Guidelines within six months after their publication. After that date, the competent authorities must ensure that institutions comply with the Guidelines effectively.

Guidelines on Stressed Value-At-Risk (Stressed VaR)

These Guidelines include provisions on Stressed VaR modelling by credit institutions using the Internal Model Approach for the calculation of the required capital for market risk in the trading book.

The main provisions of the Guidelines relate to:

• the identification and the review of the stressed period;
• the Stressed VaR methodology;
• the Use test.

Guidelines on the Incremental Default and Migration Risk Charge (IRC)

These Guidelines include provisions on the IRC modelling approaches employed by credit institutions using the Internal Model Approach (IMA) for the calculation of the required capital for specific interest risk in the trading book. The incremental risk charge is intended to complement additional standards being applied to the value-at-risk (VaR) modelling framework in the trading book.

The main provisions of the Guidelines relate to:

• the scope of application;
• individual modelling of all aspects of the IRC approach;
• the interdependence between default and migration events;
• the profit and losses (P&L) valuation including how ratings changes impact on market prices and on the computation of P&L;
• the liquidity horizons;
• the validation and use test for IRC models.

Press release

Guidelines Stressed VaR

Guidelines IRC

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