(a) General requirement. A Board-regulated institution must use
one of the methods in this section to measure the specific risk for
each of its debt, equity, and securitization positions with specific
risk.
(b) Modeled specific
risk. A Board-regulated institution may use models to measure
the specific risk of covered positions as provided in paragraph (a)
of section 205 of this subpart (therefore, excluding securitization
positions that are not modeled under section 209 of this subpart).
A Board-regulated institution must use models to measure the specific
risk of correlation trading positions that are modeled under section
217.209.
(1) Requirements for specific risk modeling.
(i) If a
Board-regulated institution uses internal models to measure the specific
risk of a portfolio, the internal models must:
(A) Explain the
historical price variation in the portfolio;
(B) Be responsive to changes in market conditions;
(C) Be robust to an adverse
environment, including signaling rising risk in an adverse environment;
and
(D) Capture all material
components of specific risk for the debt and equity positions in the
portfolio. Specifically, the internal models must:
(1) Capture event risk and idiosyncratic
risk; and
(2)
Capture and demonstrate sensitivity to material differences between
positions that are similar but not identical and to changes in portfolio
composition and concentrations.
(ii) If a Board-regulated
institution calculates an incremental risk measure for a portfolio
of debt or equity positions under section 208 of this subpart, the
Board-regulated institution is not required to capture default and
credit migration risks in its internal models used to measure the
specific risk of those portfolios.
(2) Specific
risk fully modeled for one or more portfolios. If the Board-regulated
institution’s VaR-based measure captures all material aspects of specific
risk for one or more of its portfolios of debt, equity, or correlation
trading positions, the Board-regulated institution has no specific
risk add-on for those portfolios for purposes of paragraph (a)(2)(iii)
of section 217.204.
(c) Specific risk not modeled.
(1) If the Board-regulated institution’s
VaR-based measure does not capture all material aspects of specific
risk for a portfolio of debt, equity, or correlation trading positions,
the Board-regulated institution must calculate a specific-risk add-on
for the portfolio under the standardized measurement method as described
in section 217.210.
(2) A Board-regulated institution must calculate a specific risk
add-on under the standardized measurement method as described in section
217.210 for all of its securitization positions that are not modeled
under section 217.209.
