3. The main feature of the April 1995 proposal was to respond to the industry's request to allow banks to use proprietary in-house models for measuring market risks as an alternative to a standardised measurement framework originally put forward in April 1993. In order to ensure a minimum degree of prudence, transparency and consistency of capital requirements across banks, the Committee proposed a number of quantitative and qualitative criteria for those banks which wish to use proprietary models. Section II below summarises the comments received on this proposal and the reasons for the Committee's decisions regarding the quantitative criteria that will govern the use of proprietary models for determining capital charges. These require that "value-at-risk" be computed daily, using a 99th percentile, one-tailed confidence interval; that a minimum price shock equivalent to ten trading days (holding period) be used; and that the model incorporate a historical observation period of at least one year. The capital charge for a bank that uses a proprietary model will be the higher of: the previous day's value-at-risk;
three times the average of the daily value-at-risk of the preceding sixty business days.
4. The quantitative and qualitative criteria for the use of internal models for capital purposes are presented in detail in Part B of the Amendment to the Accord. The most significant change from the April 1995 proposal is that banks will have more flexibility in specifying model parameters, including the possibility of recognising correlation effects across (as well as within) broad risk factor categories. Overall, the Committee has been inclined to take a conservative approach in its choice of parameters, and it reserves the right to modify the specifications required for banks using models as more experience is gained.
5. So far as the standardised method is concerned, the substance of the April 1995 proposal is largely unchanged, as described in Section III below. The standardised approach is presented in Part A of the Amendment to the Accord.
