Title[ Part 3: The Second Pillar - Supervisory Review Process
Section[ 4. Specific risk modelling under the internal models approach
778 (iv). For banks wishing to model the specific risk arising from their trading activities, additional criteria have been set out in the revised section B.8, paragraph 2 of the Market Risk Amendment, including conservatively assessing the risk arising from less liquid positions and/or positions with limited price transparency under realistic market scenarios. Where supervisors consider that limited liquidity or price transparency undermines the effectiveness of a bank’s model to capture the specific risk, they will take appropriate measures, including requiring the exclusion of positions from the bank’s specific risk model. Supervisors should review the adequacy of the bank’s measure of the default risk surcharge; where the bank’s approach is inadequate, the use of the standardised specific risk charges will be required.
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