69. Market risk is the risk of losses in on- and off-balance sheet positions arising from movements in market factors such as interest rates, foreign exchange rates, equity prices, commodities prices, credit spreads, and options volatilities. Each bank should have methodologies and limits that enable it to assess and actively manage all material market risks, at several levels of granularity including position, desk, business line, or firm-wide level.

70. Under its ICAAP, each bank should assess its capital adequacy for market risk by considering methods other than the regulatory standardised approach for market risk. Each bank should start this assessment with the metrics already employed to measure market risk as part of regular risk management, including net open positions (NOP), value-at-risk (VaR), stressed VaR, and economic stress tests. The calibration of capital associated to Pillar 2 risks should be undertaken with prudence and should include risks such as concentration risk, market illiquidity, basis risk, and jump-to-default risk.

71. Ultimately, market risk capital should be designed to protect the bank against market risk volatility over the long term, including periods of stress and high volatility. Therefore, each bank should ensure that such calibration include appropriate stressed periods. The analysis should be structured based on the bank’s key drivers of market risk, including portfolios, asset classes, market risk factors, geographies, product types and tenors.

72. Each bank should analyse its amortised cost portfolio under Pillar 2, considering the difference between the market value against the book value.