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  • CA-14.10 CA-14.10 Combination of Internal Models and the Standardised Methodology

    • CA-14.10.1

      Unless a conventional bank licensee's exposure to a particular risk factor is insignificant, the internal models approach, in principle, require conventional bank licensees 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, conventional bank licensees which start to use models for one or more risk factor categories, over a reasonable period of time, must extend the models to all their market risks.

      January 2015

    • CA-14.10.2

      A conventional bank licensee which has obtained the CBB's approval for the use of one or more models is no longer able to revert to measuring the risk measured by those models according to the standardised methodology (unless the CBB withdraws its approval for the model(s), as explained in Section CA-14.9). However, what constitutes a reasonable period of time for an individual conventional bank licensee which uses a combination of internal models and the standardised methodology to move to a comprehensive model, will be decided by the CBB after taking into account the relevant circumstances of the conventional bank licensee.

      January 2015

    • CA-14.10.3

      Notwithstanding the goal of moving to comprehensive internal models as set out in Paragraph CA-14.10.1, for conventional bank licensees which, for the time being, will be applying a combination of internal models and the standardised methodology, the following conditions apply:

      (a) Each broad risk factor category must be assessed by applying 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 conventional bank licensee's different entities for the same type of risk;
      (b) All of the criteria laid down in this Chapter apply to the models being used;
      (c) Conventional bank licensees may not modify the combination of the two approaches which they are applying, without justifying to the CBB that they have a valid reason for doing so, and obtaining the CBB'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 must be aggregated applying the simple sum method.
      January 2015