What changed
RBI issued guidelines for banks to adopt the Internal Models Approach (IMA) for market risk under Basel II, effective from April 1, 2010. Banks can now use their own VaR-based models for general market risk, while continuing the Standardised Measurement Method for specific risk. RBI will assess banks' preparedness before approving migration.
What it means for you
Banks can reduce capital charges by using more risk-sensitive internal models, but must invest in robust risk management systems. The approval process is rigorous, requiring a notice of intention, preliminary assessment, and detailed model analysis. This shift encourages better risk measurement but adds compliance complexity.
What you must do
- Assess your bank's readiness against the annexed IMA guidelines before applying.
- Submit a notice of intention to RBI's Department of Banking Operations & Development for preliminary assessment.
- Develop capabilities to model specific risk and incremental risk for future compliance.
- Prepare for a formal application in the prescribed format once RBI gives preliminary clearance.
Who it affects
All commercial banks (excluding RRBs and LABs), Risk management departments, Capital adequacy and treasury teams
Can banks use IMA for specific risk immediately?
No, initially banks can only model general market risk under IMA. Specific risk must still use the Standardised Measurement Method until capabilities are developed.
What is the first step to migrate to IMA?
Banks must send a notice of intention to RBI's Chief General Manager at the Mumbai central office. RBI will then conduct a preliminary assessment of the bank's risk management and modelling process.
Does adopting IMA for market risk require using advanced approaches for credit or operational risk?
No, banks have discretion to adopt IMA for market risk alone while continuing simpler approaches for credit and operational risk capital computation.