On 27 August 2020, the Prudential Regulation Authority (PRA) published a statement setting out its decision to terminate its temporary approach to value-at-risk (VAR) back-testing exceptions from 30 September 2020.
This statement follows the PRA’s review of the temporary approach that allowed firms to offset increases due to new back-testing exceptions through a commensurate reduction in risks-not-in-VAR (RNIV) capital requirements that it committed to in its earlier statement published on 30 March 2020.
In light of the amendments to the Capital Requirements Regulation (CRR) in response to the COVID-19 outbreak (the CRR “Quick Fix”) the PRA has decided to terminate its temporary approach to VAR back-testing exceptions from Wednesday 30 September 2020. From Thursday 1 October 2020 onwards, firms should no longer apply any commensurate reduction in RNIV capital requirements.
The PRA states that for back-testing exceptions that occur between Wednesday 1 January 2020 and Friday 31 December 2021 that do not result from deficiencies in their internal model, firms should now apply to the PRA in accordance with CRR Article 500c to exclude those exceptions from the calculation of their back-testing addend.