Market Risk – How to achieve Internal Model Approval
The agreement of the Market Risk Amendment in April 1995 gave banks the option of using their own internal risk management models to measure their market risk as an alternative to the standardized measurement approach (SMM), subject to meeting a number of requirements and gaining approval for their analytical and operational methods from their supervisory body. This is known as the Internal Model Approach (IMA).
Banks use a number of highly advanced techniques to manage market risk, among which Value-at-Risk (VaR) has become not only the industry but also the regulatory benchmark, since its acceptance as a component of IMA.
But what are the pitfalls, and does the long journey to approval really justify the benefits?
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