| TO: |
CHIEF
EXECUTIVE OFFICER
|
| SUBJECT: |
Proposed
Requirements for Banks to
"Backtest" Internal Models for Predicting Market Risk |
|
The
FDIC, the Office of the Comptroller of the Currency
and the Federal Reserve Board have jointly proposed
for public comment a rule to require banks with
large trading portfolios to monitor the performance
of the internal models used to estimate the market
risk of their portfolios. Under this proposal,
affected banks would compare past estimates of
market risk with actual results -- a process known
as "backtesting." Banks using models that produce
poor backtesting results may be required to increase
their capital for market risk. A copy of the
Federal
Register
notice describing the proposal is
attached.
The proposed rule expands on a July 1995 proposal (see FIL-50-95, dated July 31, 1995) to establish a capital requirement for market risk in foreign exchange and commodity activities and in the trading of debt and equity instruments. Under the July proposal, institutions with large trading activities would calculate their risk-based capital requirements using their own internal model estimates of "value-at-risk" -- essentially a probability-weighted measure of the amount a trading portfolio might decline during a given holding period. The FDIC will accept public comments on the new proposal until April 5, 1996. For more information about the proposal, please contact one of the FDIC officials listed on Page 9114 of the attached Federal Register notice.
Attachment: PDF Format (54 kb, PDF help or hard copy ), HTML Format Distribution: FDIC-Supervised Banks (Commercial and Savings) |