September 07, 2018

ECB is consulting on the credit risk, market risk, and counterparty credit risk chapters of its guide to internal models for banks. The chapters on specific risk-types focus on providing transparency about the way ECB understands the applicable regulations for using internal models to calculate own fund requirements for credit risk, market risk, and counterparty credit risk. The consultation ends on November 07, 2018. ECB also published frequently asked questions (FAQs) on the ECB guide on specific risk-types.

The content of each chapter of the ECB guide is based on the requirements of the Capital Requirements Regulation, or CRR, (Regulation No 575/2013). Each chapter in the consultation expresses how the regulatory provisions of relevance to the topic in question are understood by ECB when it reviews the internal models used by institutions to calculate their own funds requirements. The following key topics have been covered in each chapter:

  • The credit risk chapter covers selected topics regarding the internal ratings-based approach for calculating own funds requirements, including an initial section covering data maintenance for this approach followed by specific modeling aspects related to the estimation of probability of default (PD), loss given default (LGD), and conversion factor (CCF).
  • Regarding the market risk chapter, the selected topics focus on specific modeling aspects related to back-testing of value-at-risk (VaR) models, VaR and stressed VaR methodologies, incremental risk charge methodology, and a framework for risks not captured in the model engines (known as RNIME).
  • The counterparty credit risk chapter outlines ECB’s understanding of the regulatory requirements defined for the Internal Model Method, as referred to in Part Three, Title II, Chapter 6, Section 6 of CRR

The general topics chapter of this guide was published for consultation on March 28, 2018. ECB takes the specificities of each bank into consideration when applying the relevant framework. Certain articles of the Capital Requirements Regulation, or CRR, (Regulation No 575/2013) require ECB to grant permission to use internal models for credit risk, counterparty credit risk, and market risk, where the requirements set out in the corresponding chapters of the CRR are met by the institutions concerned. The guide was drafted in close cooperation with the national competent authorities and draws on the experience gained from on-site investigations in the context of the targeted review of internal models (TRIM) project in 2017 and 2018. It also draws on the feedback received from institutions on a first version of the guide that was made available on February 28, 2017.

 

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Comment Due Date: November 07, 2018

Keywords: Europe, EU, Banking, Internal Models, TRIM, Credit Risk, Market Risk, Counterparty Credit Risk, CRR, ECB

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