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APRA issues letter to ADIs on treatment of risks not in Value at Risk

Tuesday 18 May 2021

The Australian Prudential Regulation Authority (APRA) has issued a letter to authorised deposit-taking institutions (ADIs) to improve the consistency of the application, capital outcomes and reporting of Risks-not-in-Value at Risk (RNIV) for ADIs accredited to use the internal model approach (IMA) to traded market risk.

IMA ADIs use Value at Risk (VaR) models to determine their regulatory market risk capital. These VaR models rarely completely capture all of a bank’s traded market risk. Model gaps (RNIV)  are required to be identified, capitalised and reported in accordance with the existing Prudential Standard APS 116 Market Risk.

The letter to ADIs is available on the APRA website at Market Risk Modelling: Risks-not-in-VAR.

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The Australian Prudential Regulation Authority (APRA) is the prudential regulator of the financial services industry. It oversees banks, credit unions, building societies, general insurance and reinsurance companies, life insurance, private health insurers, friendly societies, and most members of the superannuation industry. APRA currently supervises institutions holding $7.7 trillion in assets for Australian depositors, policyholders and superannuation fund members.