On 29 January 2024, there was published in the Official Journal of the EU (OJ), Commission Delegated Regulation (EU) 2024/397 of 20 October 2023 supplementing the Capital Requirements Regulation (CRR) as regards regulatory technical standards (RTS) on the calculation of the stress scenario risk measure.

The RTS foresee two overarching methods to develop the extreme scenarios of future shock for non-modellable risk factors:

  • The first, the direct method, requires institutions to develop the extreme scenario of future shock for a given non-modellable risk factor by calculating the expected shortfall measure of the losses occurring when varying that risk factor according to its historically observed levels during a stress period.
  • The second, the stepwise method, requires institutions to obtain the extreme scenario of future shock for a given non-modellable risk factor by calculating an expected shortfall measure on the returns observed for that risk factor, and calculating the loss corresponding to the movement in the risk factor identified by that expected shortfall measure.

In addition, the RTS:

  • Specify that the regulatory extreme scenario of future shock is the one that leads to the maximum possible loss due to a movement in the non-modellable risk factor. When such loss is infinite, the RTS specify that institutions are to use an expert-based approach to identify a loss due to a change in the value taken by the non-modellable risk factor that will not be exceeded with a level of certainty equal to 99,95%.
  • Set out that institutions may calculate a single stress scenario risk measure for more than one non-modellable risk factor, when those risk factors belong to the same standardised bucket and institutions used that standardised bucket when assessing the modellability of those risk factors under Article 325be of the CRR.
  • Require institutions to aggregate the stress scenario risk measures in accordance with the aggregation formula provided in the international standards.

Next steps

The Delegated Regulation enters into force on 18 February 2024, 20 days after publication in the OJ.