A Universal Stress Scenario Approach for Capitalising Non-modellable Risk Factors Under the FRTB

35 Pages Posted: 13 Jul 2021

See all articles by Martin Aichele

Martin Aichele

European Central Bank (ECB)

Marco Giovanni Crotti

European Banking Authority

Benedikt Rehle

European Parliament

Date Written: July 12, 2021

Abstract

EU legislators mandated the European Banking Authority to propose a stress scenario methodology for capitalising non-modellable risk factors (NMRF) as foreseen under the Basel Fundamental Review of the Trading Book (FRTB) rules for market risk. In this paper, we present the foundations of such a methodology.

By design, it is universally applicable to all kinds of risk factors to which a bank may be exposed, and it caters for a wide range of data availability by adjusting the stress scenario for the number of returns observed in the calibration period. It captures non-linearities in the portfolio loss profile against changes in the NMRF, while reducing the computational effort and being simple.

To motivate the values set for some parameters in the methodology, we use a set of skewed generalised ‘t’ (SGT) distributions as a generic tool for describing a wide universe of real historical returns from all asset classes.

Finally, we extend the methodology from single risk factors to segments of curves or surfaces as envisaged in the FRTB.

Keywords: Market risk, FRTB, NMRF, capital requirements for non-modellable risk factors, sampling error for the expected shortfall, SGT distributions

JEL Classification: C13, C46, G21, G28, G32

Suggested Citation

Aichele, Martin and Crotti, Marco Giovanni and Rehle, Benedikt, A Universal Stress Scenario Approach for Capitalising Non-modellable Risk Factors Under the FRTB (July 12, 2021). European Banking Authority Research Paper No. 14, Available at SSRN: https://ssrn.com/abstract=3884845 or http://dx.doi.org/10.2139/ssrn.3884845

Martin Aichele (Contact Author)

European Central Bank (ECB) ( email )

Sonnemannstrasse 22
Frankfurt am Main, 60314
Germany

Marco Giovanni Crotti

European Banking Authority ( email )

20 avenue André Prothin CS 30154
One Canada Square, Canary Wharf
92927 Paris, La Défense CEDEX E14 5AA
France

Benedikt Rehle

European Parliament ( email )

Bât. Altiero Spinelli
60 rue Wiertz / Wiertzstraat 60
Brussels, B-1047
Belgium

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