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Banks Act, 1990 (Act No. 94 of 1990)

Regulations

Regulations relating to Banks' Financial Instrument Trading

Chapter 7 : Use of Internal Models

30. Combination of internal models and the standardised methodology

 

(1) When a bank's exposure to a particular risk, for example, with regard to commodity prices, is insignificant, the internal model approach in principle requires a bank to have an integrated risk-measurement system that evaluates the risk categories (that is, interest rates, exchange rates (which may include gold), equity prices and commodity prices, with related option volatilities included in each risk-factor category). When a bank starts to use models for one or more risk categories, it shall be expected over time to extend the models to measure all market risks. In cases when a bank has developed one or more models, it will no longer be allowed to revert to measuring the risk according to one of the standardised methodologies mentioned in regulations 14 and 15, respectively. Pending further experience regarding the procedure to change to a model-based approach, prior written approval shall be obtained from the Registrar to use a combination of internal models and one of the standardised methodologies for the time frame required to migrate to a comprehensive model.

 

(2) The following conditions shall apply to a bank using such combinations:
(a) Each risk category shall be assessed using a single approach (either internal models or the standardised approach), that is, no combination of the two methods shall be permitted within a risk category or across the bank's different risk centres for the same type of risk;
(b) all the criteria prescribed in this chapter shall apply to the models being used;
(c) a bank shall not modify the combination of the two approaches that it uses without the prior written approval of the Registrar;
(d) no element of market risk may escape measurement, that is, the exposure in respect of all the various risks, whether calculated according to the standardised approach or internal models, shall be captured; and
(e) the capital-adequacy requirement calculated in accordance with the standardised approach and in accordance with the internal model approach are to be aggregated according to the aggregation method.