Article 325bj - Internal validation
Table of content
Institutions shall conduct the validation referred to in paragraph 1 in the following circumstances:
when any internal risk-measurement model is initially developed and when any significant changes are made to that model;
on a periodic basis, and where there have been significant structural changes in the market or changes to the composition of the portfolio which might lead to the internal risk-measurement model no longer being adequate.
The validation of the internal risk-measurement models of an institution shall not be limited to back-testing and P&L attribution requirements, but shall, at a minimum, include the following:
tests to verify whether the assumptions made in the internal model are appropriate and do not underestimate or overestimate the risk;
own internal model validation tests, including back-testing in addition to the regulatory back-testing programmes, in relation to the risks and structures of their portfolios;
the use of hypothetical portfolios to ensure that the internal risk-measurement model is able to account for particular structural features that may arise, for example, material basis risks and concentration risk, or the risks associated with the use of proxies.