FI Proposes Updated Methodology for Assessing Specific Capital Requirements for Non-Trading Book Market Risks

Background

On 14 February 2024, Finansinspektionen (FI) published a consultation memorandum (FI dnr 24-4186), which proposes changes to the methodology for assessing Pillar 2 capital add-ons for non-trading book market risk. The methodology will replace the current one, released in December 2020, described in the memorandum Pillar 2 methodology for assessing capital add-ons for market risks in other activities (FI dnr 19-443).

FI's main approach to assessing the specific own funds requirement for gap risk, credit spread risk and basis risk is essentially unchanged compared to the current memorandum. The changes that FI is now proposing are primarily aimed at clarifying FI's assessment criteria for firms' internal methods. FI proposes that the new method be applied in the Supervisory Review and Evaluation Process (SREP) from the date when the updated memorandum is decided, provisionally from 30 April 2024. This means that FI will apply the method in decisions on specific own funds requirements that are announced after this date.

Primary Changes

The changes proposed by FI mainly concern stricter and clarified assessment criteria for the institutions' internal methods, including

• Internal governance and control
• Internal reporting of the outcome
• Data sources and data history
• Independent validation
• The assessment of modelling risk
• Quarterly outcome tests
• Documentation of expert judgements
• Review by independent audit function
• Methodological documentation

Some adjustments are proposed to align the gap risk methodology with the new EBA guidelines and technical standards:

• Some computational elements have been aligned with the EBA technical standards for the calculation of supervisory outlier tests, such as the interest rate floor.
• Proportionality and thresholds are taken into account for non-maturity deposits, fixed rate loans with early repayment options, term deposits with early repayment options and other instruments.
• FI intends to continue to reflect in the standardised approach the absence of contractual maturity for NMDs, and that it is therefore considered as O/N.
• When using the IRB approach to model the behavioural maturity of NMDs, the weighted average duration of the durable volume used is limited to 1 year.

Changes to other standardised methods:

• Only clarifications have been added to the standardised approach to assess the capital requirement for credit spread risk.
• No changes are proposed to the standardised approach for assessing the capital requirement for basis risk.

Conclusion and Next Steps

The methodology and calculations for assessing the specific own funds requirement are essentially unchanged compared to what is stated in the current memorandum. FI remains conservative regarding NMD modelling in comparison to the EBA's methods, but now allows longer maturities than before in internal methods.

NFC recommends companies that currently use internal methods to conduct a gap analysis against the new requirements to ensure that the stricter and clarified requirements are met. Read more about our risk modelling and model validation services, or contact us if you have any questions about the new FI consultation memorandum and how the FI methodology should be applied in relation to the new EBA IRRBB regulatory package.