Circular NBB_2012_08: Implementation of EBA Guidelines on Stressed Value-at-Risk (sVaR) and Incremental Default and Migration Risk Charge (IRC)

NBB_2012_08 – 7 August 2012 Circular
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Prudential Policy and Financial Stability
Berlaimont Boulevard 14 – BE-1000 Brussels
Tel. +32 2 221 xx xx – Fax + 32 2 221 xx xx
Company number: 0203.201.340
RPM Brussels www.bnb.be Circular
Brussels, 7 August 2012
Reference: NBB_2012_08
Page(s): 2
your contact:
Marc Peters
Tel. +32 2 221 39 96 – Fax +32 2 221 31 04 marc.peters@nbb.be EBA Guidelines of 16 May 2012 on Stressed Value-at-Risk (sVaR) and Incremental Default and Migration Risk Charge (IRC) Scope This circular is addressed to financial companies, credit institutions, investment firms, resolution bodies, and entities assimilated to resolution bodies. Summary/Objectives This circular aims to transpose the EBA guidelines of 16 May 2012 on sVaR and IRC into the Belgian prudential framework. Madam, Sir, This circular aims to transpose the European Banking Authority (EBA) guidelines of 16 May 2012 on Stressed Value-at-Risk (sVaR) and Incremental Default and Migration Risk Charge (IRC) into the Belgian prudential framework. It reproduces, in the annex and in their entirety, the texts developed by the EBA in English. The annexes mentioned in this circular can be consulted on the website of the National Bank of Belgium. A public consultation on these guidelines was organized by the EBA from 30 November 2011 to 15 January 2012. These guidelines fall within the framework of the amendments made by Directive 2010/76/EU of 24 November 2010 regarding capital requirements for the trading book and for securitizations. These amendments were transposed into Belgian law through the regulation of the National Bank of Belgium (hereinafter "the Bank") on the capital of credit institutions and investment firms of 15 November 2011. Thus, the use of internal models for the treatment of specific position risk is now conditional on the calculation of an additional capital requirement for default and migration risk determined on the basis of a time horizon of 1 year and on a liquidity horizon of at least 3 months. This is the Incremental Default and Migration Risk Charge or IRC.

Circular NBB_2012_08 – 7 August 2012
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Furthermore, institutions using an internal model must now calculate an additional capital requirement based on the value at risk during periods of stress in financial markets. This is the Stressed Value-at-Risk or sVaR. The EBA guidelines aim to clarify the prudential expectations regarding these new provisions and to ensure convergence of practices at the European level. The main elements of the guidelines on sVaR concern (1) the identification and revision of the stressed market period used, (2) the methodological approach regarding sVaR and its consistency with the value at risk model used by the institution, as well as (3) the use test concept for sVaR. The guidelines on IRC essentially cover the following aspects: (1) the scope of this additional requirement, (2) the methodological approach regarding IRC, including notably the consideration of liquidity horizons and valuation aspects, (3) the validation of IRC models, and (4) the use test concept. The Bank will rely on the principles set out in these guidelines as part of its evaluation of the internal models used for the calculation of capital requirements for market risks. The Bank expects the administrative bodies of each institution to ensure the implementation of an adequate risk management system, requiring a set of effective integrated measures, adapted to the organization and functioning of the institution and in accordance with the principles of sound and prudent management. In this context, institutions will take the necessary measures to comply with the principles set out in these guidelines. An electronic version of the circular and its annexes is available on the BNB website (www.nbb.be) under the following sections:

• for financial companies and credit institutions:
  Control Areas > Credit Institutions > Circulars and communications
• for stock exchange companies:
  Control Areas > Stock Exchange Companies > Circulars and communications
• for resolution bodies and similar entities:
  Control Areas > Resolution and Clearing Bodies > Circulars and communications A copy of this is sent to the auditor(s) and approved auditor(s) of your institution.
  Please accept, Madam, Sir, the expression of my distinguished consideration.
  Luc Coene
  Governor
  Annexes:
  NBB_2012_08-1 - EBA Guidelines on Stressed Value At Risk (Stressed VaR) EBA/GL/2012/2 - London, 16.05.2012 NBB_2012_08-2 - EBA Guidelines on the Incremental Default and Migration Risk Charge (IRC) EBA/GL/2012/3 - London, 16.05.2012