12 CFR § 217.153 - Internal models approach (IMA).

§ 217.153 Internal models approach (IMA).

(a)General. A Board-regulated institution may calculate its risk-weighted asset amount for equity exposures using the IMA by modeling publicly traded and non-publicly traded equity exposures (in accordance with paragraph (c) of this section) or by modeling only publicly traded equity exposures (in accordance with paragraphs (c) and (d) of this section).

(b)Qualifying criteria. To qualify to use the IMA to calculate risk-weighted assets for equity exposures, a Board-regulated institution must receive prior written approval from the Board. To receive such approval, the Board-regulated institution must demonstrate to the Board's satisfaction that the Board-regulated institution meets the following criteria:

(1) The Board-regulated institution must have one or more models that:

(i) Assess the potential decline in value of its modeled equity exposures;

(ii) Are commensurate with the size, complexity, and composition of the Board-regulated institution's modeled equity exposures; and

(iii) Adequately capture both general market risk and idiosyncratic risk.

(2) The Board-regulated institution's model must produce an estimate of potential losses for its modeled equity exposures that is no less than the estimate of potential losses produced by a VaR methodology employing a 99th percentile one-tailed confidence interval of the distribution of quarterly returns for a benchmark portfolio of equity exposures comparable to the Board-regulated institution's modeled equity exposures using a long-term sample period.

(3) The number of risk factors and exposures in the sample and the data period used for quantification in the Board-regulated institution's model and benchmarking exercise must be sufficient to provide confidence in the accuracy and robustness of the Board-regulated institution's estimates.

(4) The Board-regulated institution's model and benchmarking process must incorporate data that are relevant in representing the risk profile of the Board-regulated institution's modeled equity exposures, and must include data from at least one equity market cycle containing adverse market movements relevant to the risk profile of the Board-regulated institution's modeled equity exposures. In addition, the Board-regulated institution's benchmarking exercise must be based on daily market prices for the benchmark portfolio. If the Board-regulated institution's model uses a scenario methodology, the Board-regulated institution must demonstrate that the model produces a conservative estimate of potential losses on the Board-regulated institution's modeled equity exposures over a relevant long-term market cycle. If the Board-regulated institution employs risk factor models, the Board-regulated institution must demonstrate through empirical analysis the appropriateness of the risk factors used.

(5) The Board-regulated institution must be able to demonstrate, using theoretical arguments and empirical evidence, that any proxies used in the modeling process are comparable to the Board-regulated institution's modeled equity exposures and that the Board-regulated institution has made appropriate adjustments for differences. The Board-regulated institution must derive any proxies for its modeled equity exposures and benchmark portfolio using historical market data that are relevant to the Board-regulated institution's modeled equity exposures and benchmark portfolio (or, where not, must use appropriately adjusted data), and such proxies must be robust estimates of the risk of the Board-regulated institution's modeled equity exposures.

(c)Risk-weighted assets calculation for a Board-regulated institution using the IMA for publicly traded and non-publicly traded equity exposures. If a Board-regulated institution models publicly traded and non-publicly traded equity exposures, the Board-regulated institution's aggregate risk-weighted asset amount for its equity exposures is equal to the sum of:

(1) The risk-weighted asset amount of each equity exposure that qualifies for a 0 percent, 20 percent, or 100 percent risk weight under § 217.152(b)(1) through (b)(3)(i) (as determined under § 217.152) and each equity exposure to an investment fund (as determined under § 217.154); and

(2) The greater of:

(i) The estimate of potential losses on the Board-regulated institution's equity exposures (other than equity exposures referenced in paragraph (c)(1) of this section) generated by the Board-regulated institution's internal equity exposure model multiplied by 12.5; or

(ii) The sum of:

(A) 200 percent multiplied by the aggregate adjusted carrying value of the Board-regulated institution's publicly traded equity exposures that do not belong to a hedge pair, do not qualify for a 0 percent, 20 percent, or 100 percent risk weight under § 217.152(b)(1) through (b)(3)(i), and are not equity exposures to an investment fund;

(B) 200 percent multiplied by the aggregate ineffective portion of all hedge pairs; and

(C) 300 percent multiplied by the aggregate adjusted carrying value of the Board-regulated institution's equity exposures that are not publicly traded, do not qualify for a 0 percent, 20 percent, or 100 percent risk weight under § 217.152(b)(1) through (b)(3)(i), and are not equity exposures to an investment fund.

(d)Risk-weighted assets calculation for a Board-regulated institution using the IMA only for publicly traded equity exposures. If a Board-regulated institution models only publicly traded equity exposures, the Board-regulated institution's aggregate risk-weighted asset amount for its equity exposures is equal to the sum of:

(1) The risk-weighted asset amount of each equity exposure that qualifies for a 0 percent, 20 percent, or 100 percent risk weight under §§ 217.152(b)(1) through (b)(3)(i) (as determined under § 217.152), each equity exposure that qualifies for a 400 percent risk weight under § 217.152(b)(5) or a 600 percent risk weight under § 217.152(b)(6) (as determined under § 217.152), and each equity exposure to an investment fund (as determined under § 217.154); and

(2) The greater of:

(i) The estimate of potential losses on the Board-regulated institution's equity exposures (other than equity exposures referenced in paragraph (d)(1) of this section) generated by the Board-regulated institution's internal equity exposure model multiplied by 12.5; or

(ii) The sum of:

(A) 200 percent multiplied by the aggregate adjusted carrying value of the Board-regulated institution's publicly traded equity exposures that do not belong to a hedge pair, do not qualify for a 0 percent, 20 percent, or 100 percent risk weight under § 217.152(b)(1) through (b)(3)(i), and are not equity exposures to an investment fund; and

(B) 200 percent multiplied by the aggregate ineffective portion of all hedge pairs.