Basel Market Risk Treatment of Risks Not Captured in VaR
Summary
The document discusses how risks not included in a VaR model, such as tenor basis, cross-currency basis, and OIS-Libor spreads, are treated alongside a historical simulation VaR. The question asks whether these risks may be combined with the base VaR using estimated correlations or must instead be added without diversification under Basel-related rules.
The accepted response points to UK Prudential Regulation Authority supervisory guidance and an adapted European framework, stating that diversification recognition is not allowed for the relevant RNIV or risk-not-in-model treatment. Another response directs readers to Basel Committee market-risk standards, including charges under the standardized and internal-model approaches. The material is a signpost to regulatory sources rather than a full calculation recipe; it does not quantify capital impacts or establish that a single treatment applies across jurisdictions and regulatory regimes.
Key ideas
- The question concerns adding basis and spread risks omitted from a historical simulation VaR model.
- The cited UK and European supervisory frameworks disallow diversification recognition for the relevant risks.
- Basel market-risk standards provide related charge methods under standardized and internal-model approaches.
- The document points to regulatory references but does not provide a detailed calculation procedure.
- Applicability depends on jurisdiction and the specific regulatory framework.
Tags
Full text
# How to add Risks-Not-In-VaR (RNIV) to VaR under Basel III # How to add Risks-Not-In-VaR (RNIV) to VaR under Basel III I am trying to generate/prove the magnitude of the over-conservativeness of the regulatory VaR (internal models) under Basel III against what a more accurate VaR would be. However, I can't seem to find what the Basel III standard way to add RNIVs to VaR anywhere on google. Basically, I have a basic Historical simulation-based VaR (which has the usual yield curve and FX rates). I have generated RNIV (risks-not-in-VaR) that are the (a) tenor basis, (b) cross-currency basis and (c) OIS-Libor spreads. Now, I know and can estimate the correlations of these RNIV market-data to the yield curve, and I believe an accurate way is to add these RNIVs to the base VaR using these correlations. However, I have been challenged that I need to do simple additive of these RNIVs to the base VaR, because Basel III rules states so. I can't seem to find these explicit rules anywhere. Any regulatory capital rules expert out there? Kind regards ## Answer by Magic is in the chain (score 2, accepted) https://quant.stackexchange.com/a/45748 I assume this is UK specific as RNIV is a PRA concept. You can’t recognise diversification as per the requirements which are detailed in the ss13/13: see section 2. https://www.bankofengland.co.uk/-/media/boe/files/prudential-regulation/supervisory-statement/2017/ss1313update The EBA adapted the above framework for the banks under its supervision and called it Risk not in Model, again diversification is not allowed- please see section 7 of the below: https://www.bankingsupervision.europa.eu/ecb/pub/pdf/trim_guide.en.pdf ## Answer by ir7 (score 0) https://quant.stackexchange.com/a/45754 I think that you might also want to take a look at Basel Committee’s paper “Minimum capital requirements for market risk” that includes the new Basel III FRTB SA (in particular RRAO part) and IMA (in particular NMRF part) charge calculation methods. https://www.bis.org/bcbs/publ/d457.pdf
Shown in full with attribution under the source's licence. Licence: CC BY-SA 4.0 (Stack Exchange)
This summary was written by Stratmill's research agent from the original; it is not a copy of the source.