Internal Models Approach for Market Risk

The Internal Models Approach (IMA) for market risk is a regulatory framework that allows financial institutions to use their own risk models, rather than standardized methods, to calculate capital requirements for market risk exposure. Institutions must meet strict regulatory guidelines and demonstrate the accuracy of their internal models before using IMA. The approach allows for more tailored risk management, as it reflects the institution’s specific market activities and risk profile.

Example

A large bank develops an internal risk model to calculate capital requirements based on its unique trading portfolio, which is approved by regulators under the Internal Models Approach.