Market risk modelling

Regulatory frameworks for banks, such as those established by basel III, mandate specific capital requirements to ensure financial stability. Market risk, a key component of these requirements, quantifies the potential losses a bank could incur due to adverse movements in market prices, including interest rates, foreign exchange rates, and equity prices. Banks often employ internal models to calculate these risks, subject to supervisory approval. Voluntary add-ons, like the one implemented by Skandinaviska Enskilda banken, can be introduced by banks to bolster their capital buffers beyond regulatory minimums, often in anticipation of or response to evolving risk landscapes or internal assessments of their risk profile.

Q: What is a voluntary add-on to market risk requirements?
A: A voluntary add-on is an additional amount of capital a bank chooses to hold against its market risk exposures, exceeding the minimum requirements set by regulators. This is often done to strengthen the bank’s financial resilience.

Q: Why did Skandinaviska Enskilda Banken increase its add-on?
A: The bank increased its add-on pending approval of changes to its internal model framework, suggesting a proactive measure to align with potential new risk assessments or regulatory expectations.