BaFin

Internal risk models

Internal risk models offer financial companies such as credit institutions and insurance companies a tailored and flexible approach to adequate risk measurement and control.

Risk models are an important tool in risk management as they enable management to gain the necessary granular level of risk sensitivity. To this end, they use a large amount of data to estimate material risks that are influenced by and responsive to changes in business lines, asset quality, market variables and the economic environment.

Models-based approaches to calculate regulatory capital may be used only under stringent and comprehensive regulatory requirements, according to the decision of international standard setters and the EU and national legislators.

Such a dual use of customary, proven but also internally approved risk measurement instruments is intended to better reflect the riskiness of financial companies' assets and these companies’ internal risk assessments. As this type of risk assessment provides an adequate reflection of the risks of a financial company’s portfolio from a corporate perspective, this forms the basis – within certain limits – for determining the appropriate capital requirement for the portfolio from a supervisory perspective.

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