Commission Delegated Regulation (EU) 2024/397 of 20 October 2023 supplementing Regulation (EU) No 575/2013 of the European Parliament and of the Council with regard to regulatory technical standards on the calculation of the stress scenario risk measure

THE EUROPEAN COMMISSION,

Having regard to the Treaty on the Functioning of the European Union,

Having regard to Regulation (EU) No 575/2013 of the European Parliament and of the Council of 26 June 2013 on prudential requirements for credit institutions and amending Regulation (EU) No 648/2012 (1), and in particular Article 325bk(3), fourth subparagraph, thereof,

Whereas:

(1) To ensure a level playing field among institutions in the Union and to minimise regulatory arbitrage, the methodologies for developing extreme scenarios of future shock for non-modellable risk factors should be based on the international standards agreed in January 2019 by the Basel Committee on Banking Supervision (BCBS) (Basel framework), and should take into account the materiality of the own funds requirements for non-modellable risk factors. Therefore, specific and detailed methodologies for developing extreme scenarios of future shock for non-modellable risk factors should be laid down.

(2) The quality of data and the number of observations that are available to determine future shocks for non-modellable risk factors may vary significantly from one non-modellable risk factor to another. It is therefore necessary to ensure that extreme scenarios of future shock cover a wide range of cases. For that reason, it is necessary to provide for alternative sets of methodologies that institutions may use depending on the quality and the number of observations that are available for each non-modellable risk factor. Furthermore, institutions should reflect in their calculations the fact that fewer available data leads to a higher uncertainty of the estimates or values used to determine the extreme scenarios of future shock and should therefore become more conservative.

(3) Given its accuracy, one method to determine the extreme scenario of future shock for a non-modellable risk factor should consist of directly calculating the expected shortfall measure of the losses that would occur when applying a shock to that non-modellable risk factor with the historically observed levels during the relevant stress period. However, such method would provide reliable results only where the institution has a significant amount of data for that stress period, and would require many loss calculations per risk factor leading to a high computational effort. It is therefore necessary to provide for an alternative method that requires a significant lower number of loss calculations and applies a stepwise approach. Under that alternative method, institutions should first calculate an expected shortfall measure on the returns observed for a non-modellable risk factor, and then calculate the loss that corresponds to the movement in the risk factor identified by that expected shortfall measure. Such stepwise approach should also address the specific case where the number of observations for a non-modellable risk factor in the stress period concerned is insufficient to obtain accurate and prudent estimates. Since that situation can be expected to occur only in a limited number of cases, those cases should be addressed by leveraging on methodologies that institutions have implemented for other non-modellable risk factors for which they have more observations or, where possible, on the alternative standardised approach.

(4) The Basel framework requires that the market risk own funds requirements for non-modellable risk factors have to be calibrated to a period of stress that is the same for all non-modellable risk factors that belong to the same broad category of risk factors. To determine extreme scenarios of future shock on the basis of data observed during that identified period, institutions should collect data for non-modellable risk factors for that identified stress period.

(5) To ensure harmonisation of the calculation of the stress scenario risk measures across institutions in the Union, it is necessary to specify how institutions should identify the stress period. Those specifications should be proportionate to the purpose, and should neither require an excessive computational effort, nor the implementation of specific pricing methods. The global financial crisis of 2007–2008 has been a major stress event for the financial system. The stress period to be identified should therefore start at least from 1 January 2007. To ensure that the stress period remains relevant to an institution’s trading portfolio, institutions should periodically review that stress period. However, to limit the administrative burden on institutions, it should be only required that the frequency of such review follows at least the same quarterly frequency as the corresponding supervisory reporting.

(6) The Basel framework requires that institutions determine extreme scenarios of future shock by using the pricing methods of their risk measurement model, as those methods are used in the context of the back-testing and the profit and loss attribution test. There may be scenarios of future shock for which those pricing methods cannot determine the corresponding loss for some financial instruments or commodities. Where that is the case, institutions should act in a prudentially sound manner and target only those instruments that are affected by the pricing failure. The methodologies implemented by the institution to address those cases are not to affect in any way the results of the back-testing and the profit and loss attribution requirements laid down in Commission Delegated Regulation (EU) 2022/2059 (2).

(7) Article 325bk(3), second subparagraph, of Regulation (EU) No 575/2013 requires that the level of own funds requirements for market risk for a non-modellable risk factor is to be as high as the expected shortfall measure for that risk factor referred in Article 325bb of that Regulation, i.e. an expected shortfall of losses at a 97,5 % confidence level over a period of stress. The statistical estimators and the parameters for determining that expected shortfall measure should therefore be set in such a way that that confidence level is met.

(8) According to the Basel framework, the regulatory extreme scenario of future shock should be the one leading to the maximum loss that may occur due to a change in the non-modellable risk factor. It should therefore be specified what institutions should consider as maximum loss in cases where the maximum loss is not finite.

(9) To ensure consistency with the Basel framework, institutions should be able to determine the stress scenario risk measure for more than one non-modellable risk factors where those non-modellable risk factors are part of a curve or a surface, and where those risk factors belong to the same non-modellable bucket among those set out in Commission Delegated Regulation (EU) 2022/2060 (3), and provided that institutions have assessed their modellability in accordance with the standardised bucketing approach referred to in that Delegated Regulation. Institutions should therefore be allowed to compute a single stress scenario risk measure for more than one non-modellable risk factor under those conditions only.

(10) To ensure the adequacy of the own funds requirements for non-modellable risk factors with the risk profile of institutions, institutions should reflect in the aggregation of the stress scenario risk measures those risks that were not yet captured when determining the extreme scenario of future shock, including the liquidity horizons of the non-modellable risk factors. To ensure a level playing field, the stress scenario risk measures should be aggregated by applying the aggregation formula agreed in the Basel framework.

(11) This Regulation is based on the draft regulatory technical standards submitted to the Commission by the European Banking Authority.

(12) The European Banking Authority has conducted open public consultations on the draft regulatory technical standards on which this Regulation is based, analysed the potential related costs and benefits, and requested the advice of the Banking Stakeholder Group established in accordance with Article 37 of Regulation (EU) No 1093/2010 of the European Parliament and of the Council (4),

HAS ADOPTED THIS REGULATION:

CHAPTER 1

DEVELOPMENT AND APPLICATION OF THE EXTREME SCENARIOS OF FUTURE SHOCK

Article 1

Development of extreme scenarios of future shock and their application at risk factor level

Institutions shall develop the extreme scenarios of future shock for non-modellable risk factors by applying either of the following methods:

(b) the stepwise method set out in Article 3.

Article 2

Direct method – non-modellable risk factors

(b) they shall calculate the estimate of the right-tail expected shortfall in accordance with Article 11(2) for the time series of losses obtained in accordance with point (a).

Article 3

Stepwise method – non-modellable risk factors

(a) they shall, in accordance with Article 7, determine the time series of 10 business days returns for the non-modellable risk factor for the stress period determined in accordance with Article 12;

Article 4

Development and application of the extreme scenarios of future shock at standardised bucket level

Where institutions calculate a stress scenario risk measure for more than one non-modellable risk factor, they shall determine the extreme scenario of future shock for the non-modellable standardised bucket to which those risk factors belong in accordance with Delegated Regulation (EU) 2022/2060 by applying either of the following methods:

(b) the stepwise method set out in Article 6.

Article 5

Direct method – non-modellable standardised buckets

(b) they shall calculate the estimate of the right-tail expected shortfall in accordance with Article 11(2) for the time series of the losses obtained in accordance with point (a) of this paragraph.

Article 6

Stepwise method – non-modellable standardised buckets

(a) for each non-modellable risk factor within the non-modellable standardised bucket they shall, in accordance with Article 7, determine the time series of 10 business days returns for the stress period determined in accordance with Article 12;

For the purposes of point (c), institutions shall multiply the upward and downward calibrated shocks by the parameter β in two cases, with β = 1 and β = ⅘.

Article 7

Determination of the time series of 10 business days returns

(a) they shall determine the time series of observations for the non-modellable risk factor for the stress period and include in that time series only one observation per business day that shall represent actual market data;

(b) they shall extend the time series referred to in point (a) by including the observations available within the period of 20 business days following the stress period; where the reference date for the calculation of the stress scenario risk measure is less than 20 business days after the end of the stress period, institutions shall include those observations that are available from the end of the stress period to the reference date;

Article 8

Downward and upward calibrated shock with the historical method

where:

— Ret denotes the time series of 10 business days returns of the non-modellable risk factor;

— is the estimate of the left-tail expected shortfall for the time series Ret calculated in accordance with Article 11(1);

— N is the number of returns in the time series Ret.

where:

— Ret denotes the time series of 10 business days returns of the non-modellable risk factor;

— is the estimate of the right-tail expected shortfall for the time series Ret calculated in accordance with Article 11(2);

— N is the number of returns in the time series Ret.

Article 9

Downward and upward calibrated shock with the asymmetrical sigma method

Under the asymmetrical sigma method, institutions shall determine the downward and upward calibrated shock from a time series of 10 business days returns for a non-modellable risk factor by applying the following steps in the following order:

(b) for each subset referred in point (a), they shall compute the mean of the 10 business days returns in the subset;

Article 10

Downward and upward calibrated shock with the fallback method

(a) they shall identify the risk-weight assigned to that risk factor in accordance with Part Three, Title IV, Chapter 1a, of Regulation (EU) No 575/2013;

(c) the downward and upward calibrated shock shall be the result of point (b).

(a) from those risk factors defined in Part Three, Title IV, Chapter 1a, Section 3, Subsection 1, of Regulation (EU) No 575/2013 differing from the non-modellable risk factor only in the maturity dimension, they shall identify the risk factor that is the closest in the maturity dimension to the non-modellable risk factor;

(b) they shall identify the risk-weight assigned in accordance with Part Three, Title IV, Chapter 1a, of Regulation (EU) No 575/2013 to the risk factor identified in accordance with point (a);

(d) the downward and upward calibrated shock shall be the result of point (c).

(a) it belongs to the same broad risk factor category and broad sub-category of risk factors referred to in Article 325bd of Regulation (EU) No 575/2013 of the non-modellable risk factor;

(b) it is of the same nature as the non-modellable risk factor;

(c) it differs from the non-modellable risk factor for features that do not lead to an underestimation of the volatility of the non-modellable risk factor, including under stress conditions;

(d) its time series of 10 business days returns referred to in paragraph 6, point (a), contains at least 12 returns.