ECB Consults on Assessment Methodology for Counterparty Credit Risk
ECB launched consultation on a guide that details the supervisory assessment methodology for the internal models that banks apply to calculate their exposure to counterparty credit risk. In addition, the guide describes how ECB will assess A-CVA or the advanced methods banks use to calculate the own funds required to account for risks related to the credit valuation adjustments (CVA). Also published were the frequently asked questions about the guide. The guide is applicable to the ECB-supervised institutions that have permission to implement an internal model method or IMM, institutions that have implemented an advanced method for calculating CVA risk, and institutions seeking approval for the internal model method or CVA internal models, under the Capital Requirements Regulation. The consultation period for the guide ends on March 18, 2020.
The guide provides transparency on the supervisory expectations of ECB by clarifying the methodologies it uses to assess the counterparty credit risk model components within model investigations when assessing whether institutions meet these requirements. The guide addresses the supervisory assessment methodology for models used by banks to calculate the capital requirements for counterparty credit risk and covers initial approvals, changes, and extensions of internal models as well as ongoing model monitoring. The respective internal models are used to determine the capital requirements to be applied when banks enter into derivative or securities financing transactions with customers. These capital requirements act as a safety buffer if the bank is confronted with unexpected losses from such transactions.
The assessment methodology determines which model components need to be investigated by supervisors and the minimum level of depth and detail needed to form a supervisory judgment on the model's compliance with the existing regulation. The guide aims to harmonize supervisory practices related to the internal counterparty credit risk models and to provide transparency regarding the methodologies ECB uses to assess the components of these models during investigations. The assessment methodology outlined in the ECB guide on assessment methodology can also be used for the self-assessments of credit institutions that have or are preparing the internal counterparty credit risk models.
This guide was drafted in close cooperation with the national competent authorities and benefited from the feedback received from institutions on a first version of the guide that was made available in December 2017. It also draws on the experience gained from on-site investigations in the context of the Targeted Review of Internal Models, or TRIM, project between 2017 and 2019. After updating the guide on the basis of this feedback, including in the light of the finalized ECB guide to internal models, ECB is now conducting a public consultation and intends to publish the guide on assessment methodology in 2020.
Related Links
Comment Due Date: March 18, 2020
Keywords: Europe, EU, Banking, A-CVA, Counterparty Credit Risk, CRR, Own Funds Requirement, IMM, Internal Models, TRIM, Regulatory Capital, OTC Derivatives, Securities Financing Transactions, Credit Valuation Adjustment, Supervisory Assessment, ECB
Featured Experts
María Cañamero
Skilled market researcher; growth strategist; successful go-to-market campaign developer
Nicolas Degruson
Works with financial institutions, regulatory experts, business analysts, product managers, and software engineers to drive regulatory solutions across the globe.
Patrycja Oleksza
Applies proficiency and knowledge to regulatory capital and reporting analysis and coordinates business and product strategies in the banking technology area
Related Articles
EC Regulation Sets Out Standards for Reporting and Disclosure of MREL
EC published the Implementing Regulation 2021/763 that lays down implementing technical standards for supervisory reporting and public disclosure of the minimum requirement for own funds and eligible liabilities (MREL).
APRA Decides to Standardize Submission Date for Quarterly Reporting
APRA announced the standardization of quarterly reporting due dates for authorized deposit-taking institutions.
ECB Working Group Publishes Recommendations on EURIBOR Fallbacks
The private sector working group of ECB on euro risk-free rates published the recommendations to address events that would trigger fallbacks in the Euro Interbank Offered Rate (EURIBOR)-related contracts, along with the €STR-based EURIBOR fallback rates (rates that could be used if a fallback is triggered).
Bundesbank Publishes Supporting Documentation for Reporting by Banks
Bundesbank published a list of "EntryPoints" that are accepted in its reporting system; the list provides taxonomy version and name of the module against each EntryPoint.
EBA Publishes Phase 1 of Reporting Framework 3.1
EBA published the phase 1 of its reporting framework 3.1, with the technical package covering the new reporting requirements for investment firms (under the implementing technical standards on investment firms reporting).
APRA to Finalize Capital Adequacy Standard Revisions by January 2022
Asia Pacific Australia Banking APS 111 Capital Adequacy Regulatory Capital Basel RBNZ APRA
ESMA Issues Guidelines on Outsourcing to Cloud Service Providers
ESMA published the final guidelines on outsourcing to cloud service providers.
EBA Publishes Data on Deposit Guarantee Schemes
EBA published annual data for two key concepts and indicators in the Deposit Guarantee Schemes (DGS) Directive—available financial means and covered deposits.
OSFI Sets Out Plan for Future Guidance on Managing Technology Risk
OSFI has set out the schedule for release of draft guidance on the management of technology risks by federally regulated financial institutions and private pension plans.
MAS Updates Housing Loan Rules, Proposes Corporate Governance Guidance
MAS updated rules for new housing loans by banks and finance companies.
