ECB published the results of the assessment of internal models that banks use to calculate risk-weighted assets for credit, market, and counterparty credit risks. This targeted review of internal models, or TRIM, is aimed to ensure that banks comply with rules and implement internal models consistently. The review confirmed that the internal models of significant institutions can continue to be used for the calculation of own funds requirements, provided they remediate the identified shortcomings within the given deadlines—that is, they restore full compliance with legal requirements. In the future, banks will need to continue to invest in high-quality models and, thus, it is particularly important that banks further strengthen their internal validation function.
The review also concludes that further efforts and investments are expected to support institutions in deciding on their model strategies. Defining these internal model strategies will support institutions in the decision on the optimal use of time and resources invested in model development and maintenance and may lead to simplifications in the current model landscapes, as part of the preparation for upcoming regulatory developments. These developments foresee the decommissioning of some existing models—or to the corresponding necessary improvements also for some less material or less critical models. Going forward the positive experience and wealth of results from TRIM will bring long-lasting and sustainable benefits beyond the project itself, not least by helping institutions to be better prepared to face current and future challenges related either to economic shocks or to the adaptation of existing models to regulatory developments. The implementation of Basel III standards, through the amendments to the Capital Requirements Regulation (CRR), the regulatory review of the internal ratings-based approach led by EBA and the remediation of TRIM findings should provide complementary layers of safeguarding against inadequate internal models. Good internal models help to measure risk appropriately, thus better preparing banks to react and answer to economic shocks like the COVID-19 pandemic.
The TRIM was a multi-year project launched by ECB at the beginning of 2016, in close cooperation with the national competent authorities that are part of European banking supervision. TRIM aimed to assess whether the Pillar I internal models used by significant institutions within the Single Supervisory Mechanism (SSM) are appropriate in the light of the applicable regulatory requirements and whether their results are reliable and comparable. Furthermore, TRIM aimed to harmonize supervisory practices for internal models in the SSM. With 200 on-site investigations conducted at 65 significant banks using internal models, TRIM is the largest project ever carried out by the ECB Banking Supervision. The findings communicated within TRIM have been followed up with binding supervisory decisions requesting the institutions to address these shortcomings. ECB identified over 5,000 findings and issued binding supervisory measures for banks to take corrective action within given deadlines. Through such measures, TRIM resulted in a 12% increase, or about EUR 275 billion, of risk-weighted assets for the investigated models.
Keywords: Europe, EU, Banking, TRIM, Internal Models, Credit Risk, Market Risk, SSM, Counterparty Credit Risk, Regulatory Capital, Basel, SSM, ECB
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