On 4 June 2020, the European Banking Authority (EBA) issued a consultation paper regarding draft regulatory technical standards (RTS) on the calculation of the stress scenario risk measure under Article 325bk(3) of the revised Capital Requirements Regulation (CRR2).
The CRR2 implements, among other things, the revised requirements to compute own funds requirements for market risk of the Basel III package, i.e. the Fundamental Review of the Trading Book (FRTB).
A feature of the FRTB is the classification of risk-factors that are included in the risk measurement model of the bank as modellable or non-modellable. As a result, the standards set that institutions must calculate a separate stress scenario risk measure for each non-modellable risk factor (or non-modellable bucket). This must be calibrated to be at least as prudent as the expected shortfall calibration used for modelled risks (i.e. a loss calibrated to a 97.5% confidence threshold over a period of extreme stress for the given risk factor or the given bucket).
The draft RTS set out the methodologies that institutions are required to use for the purpose of determining the extreme scenario of future shock that, when applied to the non-modellable risk factor, provides the stress scenario risk-measure. In particular, the draft RTS identify two over-arching approaches, upon which the EBA is consulting, that may be used by institutions for determining an extreme scenario of future shock. Only one of the two will be kept after consultation. Considering that each approach has its own specific features, two versions of the draft RTS are included in the consultation paper to consistently present how the whole framework would work under each of those two approaches.
The deadline for comments on the consultation paper is 4 September 2020.