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Monetary Board Approves Market Risk Model Recognition Procedure

01.08.2004

The Monetary Board approved on 18 December 2003 the procedure to be observed by banks applying for BSP recognition of their own internal models for calculating their market risk capital requirement in lieu of the standardized methodology prescribed in BSP Circular No. 360, which took effect on 1 July 2003.

The BSP approval shall be granted only upon meeting certain qualitative and quantitative criteria relating to the models themselves and the controls surrounding them.

The qualitative standards aim to ensure that the banks using the models have market risk management systems that are conceptually sound and implemented with integrity. This requires, among others, that the models be closely integrated into the day-to-day risk management process; and that the risk measurement system be independently reviewed by the bank’s own internal auditing process.

The quantitative standards, on the other hand, are expressed as a number of broad risk measurement parameters for banks’ internal models, together with a simple rule for converting the model-based measure of exposure into a supervisory capital charge.

These qualitative and quantitative standards are embodied in the approved model recognition procedure. The procedure involves four parts:

1.   Bank’s self-assessment through the use of questionnaire;

2.   BSP’s off-site assessment of the documents submitted by the applicant bank;

3.   BSP’s on-site assessment to review the technical details of the model and the controls surrounding them; and

4.   BSP’s on-going assessment to ensure continuous compliance with the qualitative and quantitative conditions for the use of the model.

With the issuance of this model recognition procedure, the BSP hopes that banks continue to improve their internal risk management systems, and to enhance their capability to internally allocate economic capital according to their risk exposures.

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