1. The use of an internal model will be conditional upon the explicit approval of the bank's supervisory authority. Home and host country supervisory authorities of banks that carry out material trading activities in multiple jurisdictions intend to work co-operatively to ensure an efficient approval process.
2. The supervisory authority will only give its approval if at a minimum:
- it is satisfied that the bank's risk management system is conceptually sound and is implemented with integrity;
- the bank has in the supervisory authority's view sufficient numbers of staff skilled in the use of sophisticated models not only in the trading area but also in the risk control, audit, and if necessary, back office areas;
- the bank's models have in the supervisory authority's judgement a proven track record of reasonable accuracy in measuring risk;
- the bank regularly conducts stress tests along the lines discussed in B.5 below.
3. Supervisory authorities will have the right to insist on a period of initial monitoring and live testing of a bank's internal model before it is used for supervisory capital purposes.
4. In addition to these general criteria, banks using internal models for capital purposes will be subject to the requirements detailed in sections B.2 to B.7.
