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Fitch: Revised model-based market risk rules costly for banks 

February 4, 2016

Matthew Amlôt, CPI Financial

The overhaul of the internal models approach - used by most banks with large trading books to calculate market risk capital requirements - will be costly, says Fitch Ratings. The Basel Committee on Banking Supervision's revised market risk framework, published in January and effective from 2019, fundamentally changes the approach.

“The model revisions should improve risk assessment capabilities, lead to higher capital charges for hard-to-model trading positions and make it easier to compare banks' results. But the model approval process and governance are being thoroughly revised and implementing the changes will require considerable investment in technology and risk management. 

“Banks will need to obtain approval for internal models desk by desk, rather than bank-wide. This will make it easier for supervisors to decline approval for a particular trading desk, if, for example, the desk is unable to satisfy model validation criteria due to back-testing failures or an inability to properly attribute profits and losses across products. But we think costs associated with building and running the more sophisticated models will be high. 

“Instead of running a single bank-wide model for a range of stressed and unstressed risk factors, multiple new models will need to be built, validated and run daily. This will multiply the number of model reviews and operational runs and add to subsequent data analysis and reporting procedures. Additional risk personnel will be required for review, oversight, and reporting purposes. Read more

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