ECB published the consolidated version of its guide to internal models for banks. The guide includes compilation of the general topics and chapters on credit, counterparty credit, and market risks. The general topics contain the overarching principles for internal models, internal model governance, internal validation, internal audit, model use, management of changes to the internal ratings-based (IRB) approach, and third-party involvement.
The chapters on specific risk-types include the following:
- The credit risk chapter helps to provide transparency on how ECB understands a number of topics related to internal models used for the IRB approach, including an initial section covering data maintenance for this approach. On these selected topics, the chapter is aligned with the EBA guidelines on the probability of default estimation, the loss given default estimation, and the treatment of defaulted exposures.
- The market risk chapter helps to provide transparency on how ECB understands a number of topics related to internal models used in the calculation of own funds requirements for market risk. This chapter covers certain modeling aspects related to regulatory back-testing of value-at-risk (VaR) models, VaR, and stressed VaR methodologies and to the incremental default and migration risk charge methodology.
- The counterparty credit risk chapter helps to provide transparency on how ECB understands a number of topics related to the principles defined for the Internal Model Method, as referred to in Part Three, Title II, Chapter 6, Section 6 of the Capital Requirements Regulation or CRR.
Based on the current applicable EU and national law, ECB guide to internal models provides transparency on how the ECB understands the rules and how it intends to apply them when assessing whether institutions meet the requirements. The guide is also intended as a document for the internal use of the different supervisory teams, with the aim of ensuring a common and consistent approach to matters related to internal models. When applying the relevant regulatory framework in specific cases, ECB will take into due consideration the particular circumstances of the institution concerned. This guide should not be construed as going beyond the current existing applicable EU and national law and, therefore, is not intended to replace, overrule or affect the applicable EU and national laws.
Keywords: Europe, EU, Banking, Internal Models, TRIM, Credit Risk, Market Risk, Counterparty Credit Risk, CRR, IRB Approach, Internal Model Method, ECB
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