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Federal Deposit Insurance Corporation

Division of Supervision

550 17th Street NW, Washington, DC 20429

Market Risk
March 15, 1996

Proposed Requirements for Banks to
"Backtest" Internal Models for Predicting Market Risk


The FDIC, the Office of the Comptroller of the Currency and the Federal Reserve Board have
jointly proposed for public comment a rule to require banks with large trading portfolios to
monitor the performance of the internal models used to estimate the market risk of their
portfolios. Under this proposal, affected banks would compare past estimates of market risk with
actual results -- a process known as "backtesting." Banks using models that produce poor
backtesting results may be required to increase their capital for market risk. A copy of
the Federal Register notice describing the proposal is attached.


The proposed rule expands on a July 1995 proposal (see FIL-50-95, dated July 31, 1995) to
establish a capital requirement for market risk in foreign exchange and commodity activities and
in the trading of debt and equity instruments. Under the July proposal, institutions with large
trading activities would calculate their risk-based capital requirements using their own internal
model estimates of "value-at-risk" -- essentially a probability-weighted measure of the amount a
trading portfolio might decline during a given holding period.
The FDIC will accept public comments on the new proposal until April 5, 1996. For more
information about the proposal, please contact one of the FDIC officials listed on Page 9114 of
the attached Federal Register notice.
Nicholas J. Ketcha Jr.

Attachment: PDF Format (54 kb, PDF help or hard copy),HTML Format
Distribution: FDIC-Supervised Banks (Commercial and Savings)


Last Updated 07/13/1999