Update to the temporary approach to VAR back-testing exceptions to mitigate the possibility of excessively pro-cyclical market risk capital requirements

This statement sets out the PRA’s decision to terminate its temporary approach to VAR back-testing exceptions from Wednesday 30 September 2020.
Published on 27 August 2020

The PRA published ‘Statement on VAR back-testing exceptions temporary approach’ on Monday 30 March 2020, advising that it would conduct a review of the temporary approach that allows firms to offset increases due to new back-testing exceptions through a commensurate reduction in risks-not-in-VAR (RNIV) capital requirements. This review has now taken place.

In light of the amendments to the Capital Requirements Regulation (CRR) in response to the Covid-19 outbreak (the CRR ‘Quick Fix’) the PRA has decided to terminate its temporary approach to VAR back-testing exceptions from Wednesday 30 September 2020. From Thursday 1 October 2020 onwards, firms should no longer apply any commensurate reduction in RNIV capital requirements. 

For back-testing exceptions that occur between Wednesday 1 January 2020 and Friday 31 December 2021 that do not result from deficiencies in their internal model, firms should now apply to the PRA in accordance with CRR Article 500c to exclude those exceptions from the calculation of their back-testing addend.