The Technical Committee believes that the current levels of regulatory capital are necessary. At the same time, the Technical Committee believes that capital requirements should be based on risk. For the calculation of market risk regulatory capital, in the light of the development of VaR methodologies since 1995, the use of VaR models is acceptable in appropriate circumstances and subject to suitable safeguards. This will enable securities firms to manage their risks more efficiently.
The supervisory framework would include not only qualitative assessment of the model and the firm's expertise in using it, but also standard parameters for the calculation of VaR outputs. The capital charge, while taking the VaR output as its starting point, would have to be adjusted upwards in some way in order to provide some coverage of extreme market events and other shortcomings of the VaR approach. Supervisors will need to ensure that they have sufficient resources and expertise for the task of VaR model recognition.
VaR methodologies for credit risk are currently being developed and may have a role in the future for regulatory capital purposes.
There are operational and other non-modelled risks which supervisors should not lose sight of. It is essential that additional buffers continue to be put in place against these risks until more risk based approaches are developed.