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The Basel Committee on Banking Supervision’s report presents the findings from a hypothetical test portfolio exercise to examine variability in banks' modelling of derivatives, and specifically in exposure modelling.
The report focuses on the internal models method and the advanced credit valuation adjustments (CVA) risk capital charge for over-the-counter (OTC) derivative trades. This exercise completes the Committee's review of trading-related internal models and follows two earlier exercises that focused on market risk RWAs that were published in January 2013 and December 2013.
Similar to the previous exercises, the quantitative results set out in this report were supported by participating banks' responses to qualitative questionnaires on modelling practices. The report also takes account of on-site visits to banks to discuss the observed variability and to help identify the key drivers.
The report presents the key findings and lists a number of observed good practices. The report also highlights areas where banks and supervisors may seek to harmonise practices to reduce variability in outcomes. Additionally, based on the results of this study, the Basel Committee is considering whether it is necessary to narrow down certain modelling choices for banks and/or harmonise supervisory practices to enhance consistency in outcomes.