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December 15, 2017

ECB published the draft guide and the frequently asked questions (FAQ) on the assessment methodology for the internal model method (IMM) and the advanced credit valuation adjustment (CVA) capital charge for counterparty credit risk (CCR). The guide indicates how ECB Banking Supervision intends to assess internal models for CCR at directly supervised banks. It also aims to provide guidance to these institutions on their self-assessment of the IMM and the advanced method for credit valuation adjustment risk (A-CVA), drawing on the approaches already defined by EBA for other risk types. Industry feedback can be submitted until March 31, 2018.

The guide should not be construed as going beyond the current applicable EU and national law and, therefore, is not intended to replace, overrule or affect applicable EU and national law. Under the Capital Requirements Regulation (CRR), financial institutions can use the IMM for CCR and the A-CVA when calculating capital requirements. These internal models focus on over-the-counter derivatives contracts and securities financing transactions, as—unlike with traditional loans—the exposures related to these products can vary during their term and, therefore, need to be calculated  differently. The output of these models is one input parameter in the calculation of a bank’s Pillar 1 capital requirements. The guide addresses the supervisory assessment methodology for initial approvals, along with the changes to, and extensions of, internal models used by banks to calculate capital requirements for CCR. The guide will be finalized following another call for feedback in 2018.

 

Related Link: Press Release and Draft Guide

Comment Due Date: March 31, 2018

Keywords: Europe, EU, Banking, IMM, CCR, Credit Risk, A-CVA, ECB

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