AI Summary of Article 325bj Internal validation
Institutions are mandated to establish robust processes ensuring that internal risk-measurement models are validated by independent and qualified parties. This validation is crucial to confirm that these models are conceptually sound and adequately capture all material risks.
Validation must occur at key intervals, including upon initial development and following any significant modifications, as well as periodically and in response to structural market changes. Beyond back-testing and P&L attribution, validation should encompass checks on assumptions, internal model tests, and hypothetical portfolios to address specific risks, such as basis and concentration risks.
Article 325bj Internal validation
1. Institutions shall have processes in place to ensure that any internal risk-measurement models used for the purposes of this Chapter have been adequately validated by suitably qualified parties that are independent of the development process, in order to ensure that any such models are conceptually sound and adequately capture all material risks.
2. Institutions shall conduct the validation referred to in paragraph 1 in the following circumstances:
(a) when any internal risk-measurement model is initially developed and when any significant changes are made to that model;
(b) 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.
3. 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:
(a) tests to verify whether the assumptions made in the internal model are appropriate and do not underestimate or overestimate the risk;
(b) 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;