The EBA publishes final standards for Supervisors assessing new market risk internal models

EBA released its final draft RTS outlining the assessment methodology for competent authorities to verify institutions‘ compliance with internal model requirements under the FRTB rules. This publication is part of the EBA’s roadmap on market risk and counterparty credit risk approaches.
The draft RTS delineate a framework for competent authorities to assess compliance in three central themes: governance, internal risk-measurement model (covering expected shortfall and stress scenario risk measure), and internal default risk model. The RTS specify assessment techniques that competent authorities must apply, while some techniques are optional, depending on the institution’s situation, allowing for proportionality considerations.
Emphasizing the importance of governance, the draft addresses various aspects such as organizational structure, decision-making processes, senior management roles, trading desk setup, risk control unit oversight, position limits, and stress testing programs. Notably, it highlights the need for institutions to consider risks related to climate change and broader environmental issues in their stress testing programs.
The draft RTS are developed in accordance with Article 325az(8)(b) CRR, focusing on the assessment methodology for internal models. They cover various aspects, including risk factor setup, liquidity horizon mapping, modellability assessment, back-testing, profit and loss attribution and the treatment of FX and commodity risk.
Reflecting adjustments to governance requirements to accommodate FRTB-specific features, the draft RTS consider approvals at trading desk levels and considerations for environmental risks. Institutions are required to incorporate environmental risk scenarios into their stress testing programs under the internal model approach until 1 January 2025.