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  • CA-9.10 CA-9.10 Combination of internal models and the standardised methodology

    • CA-9.10.1

      Unless a bank's exposure to a particular risk factor is insignificant, the internal models approach will, in principle, require banks to have an integrated risk measurement system that captures the broad risk factor categories (i.e., interest rates, exchange rates (which includes gold), equity prices and commodity prices, with related options volatilities being included in each risk factor category). Thus, banks which start to use models for one or more risk factor categories will, over a reasonable period of time, be expected to extend the models to all their market risks.

    • CA-9.10.2

      A bank which has obtained the Agency's approval for the use of one or more models will no longer be able to revert to measuring the risk measured by those models according to the standardised methodology (unless the Agency withdraws its approval for the model(s), as explained in section CA-9.9). However, what constitutes a reasonable period of time for an individual bank which uses a combination of internal models and the standardised methodology to move to a comprehensive model, will be decided by the Agency after taking into account the relevant circumstances of the bank.

    • CA-9.10.3

      Notwithstanding the goal of moving to comprehensive internal models as set out in paragraph CA-9.10.1 above, for banks which, for the time being, will be using a combination of internal models and the standardised methodology, the following conditions will apply:

      (a) each broad risk factor category must be assessed using a single approach (either internal models or the standardised approach), i.e., no combination of the two methods will, in principle, be permitted within a risk factor category or across a bank's different entities for the same type of risk (see, however, the transitional provisions in section CA-1.6)21;
      (b) all of the criteria laid down in this chapter will apply to the models being used;
      (c) banks may not modify the combination of the two approaches which they are using, without justifying to the Agency that they have a valid reason for doing so, and obtaining the Agency's prior written approval;
      (d) no element of market risk may escape measurement, i.e. the exposure for all the various risk factors, whether calculated according to the standardised approach or internal models, would have to be captured; and
      (e) the capital charges assessed under the standardised approach and under the models approach should be aggregated using the simple sum method.

      21 However, banks may incur risks in positions which are not captured by their models, for example, in minor currencies or in negligible business areas. Such risks should be measured according to the standard methodology.