Key requirementsKey requirements

Key requirements

The internal model approach is based on the use of value-at-risk (VaR) techniques. However, an ADI may seek APRA’s written approval to use a capital calculation methodology other than VaR.
In addition, an ADI must calculate a ‘stressed VaR’ measure according to the requirements set out in paragraph 34 of this Attachment.
An ADI using an internal model must meet, on a daily basis, a capital requirement expressed as:

the higher of:

1. an average of the daily VaR measures on each of the preceding sixty trading days, multiplied by a scaling factor (the total of the VaR multiplication factor and a plus factor); and

2. its previous day’s VaR number; and

   the higher of:

3. an average of the stressed VaR measures calculated over the preceding sixty trading days, multiplied by a scaling factor (the total of the multiplication factor for stressed VaR and a plus factor); and

4. its latest available stressed VaR number; and

   the incremental risk charge (IRC), where the VaR measures referred to in paragraph 1 of this Attachment include an estimation of the specific risk charge in accordance with paragraphs 43 to 45 of this Attachment; and the comprehensive risk charge, where an ADI has approval to calculate capital for its correlation trading portfolio in accordance with paragraphs 77 to 79 of this Attachment.

Both the VaR multiplication factor and the multiplication factor for stressed VaR are set by APRA, subject to a minimum of three. If an ADI using an internal model for calculating its TFC capital requirement does not adequately satisfy the requirements set out in this Attachment and the trading book requirements set out in Attachment A, but APRA does not consider the failure to satisfy those requirements material enough to withdraw model approval, APRA may, in writing, determine a multiplication factor higher than three. The plus factor, which ranges between zero and one inclusive, will depend on the ex post performance of the ADI’s internal model, as determined by back-testing of the VaR measure (refer to paragraphs 81 to 87 of this Attachment).

An ADI that does not have approval from APRA to use an internal model to calculate its specific risk capital charge must calculate the specific risk capital charge using the standard method (refer to Attachment B).
If an ADI’s internal model does not fit the VaR framework, the ADI may seek approval under paragraph 1 of this Attachment to use an alternative approach. In deciding whether to approve an alternative approach, APRA will consider whether the internal model adequately captures the risks involved and identifies the capital needed to support those risks in a comparable manner.
Unless required to do otherwise by APRA: