4. For the purposes of paragraph 1, point (c), to test the conservativeness of proxy approaches, competent authorities shall select a sample of approaches and apply, for each proxy approach, all the following steps in following order:
|
(a)
|
require the institution to provide the time series of a sample of risk factors that are not proxied and that, if proxied, would follow the proxy approach being assessed;
|
|
(b)
|
require the institution to provide the time series that would be used by applying the proxy approach being assessed to the risk factors’ time series referred to in point (a);
|
|
(c)
|
for both time series, obtain the volatilities of the risk factors in the stress period and in the last 12-month period, and verify that the volatility resulting from the proxy time series referred to in point (b) does not underestimate the volatility resulting from the time series referred to in point (a).
|
When applying that assessment method, competent authorities shall choose a sample of risk factors reflecting a variety of proxy approaches, including, where used, factor models, beta approximations, and mapping of risk factors to benchmarks, including names representative of a given sector and region or indices.