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Internal models approach (IMA)
The internal models approach is one of two methods banks can use to calculate market risk capital requirements under the forthcoming Fundamental Review of the Trading Book. The other is the standardised approach.
To qualify for IMA status, banks must pass two regulator-set tests: the P&L attribution test, which gauges how accurately a bank is able to measure the profits and losses a given trading desk generates; and back-testing, which compares the P&L figures with value-at-risk metrics. If a desk fails either test, it faces being relegated to the standardised approach.
Desks that opt for the IMA may face costly capital add-ons to account for non-modellable risk factors.
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