(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 section 217.152(b)(1)
through (b)(3)(i) (as determined under section 217.152) and each equity
exposure to an investment fund (as determined under section 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
section 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 section 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 sections 217.152(b)(1) through (b)(3)(i)
(as determined under section 217.152), each equity exposure that qualifies
for a 400 percent risk weight under section 217.152(b)(5) or a 600
percent risk weight under section 217.152(b)(6) (as determined under
section 217.152), and each equity exposure to an investment fund (as
determined under section 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 section 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.
