ECB published its guide on materiality assessment for changes or extensions to counterparty credit risk (CCR) models. The guide indicates how ECB intends to interpret the existing legal framework. In this guide, ECB explains approval criteria for changes to internal models that directly supervised banks use to calculate capital requirements for counterparty credit and credit valuation adjustment risks. The guide should support both institutions and supervisors regarding the ongoing model monitoring activities, the introduction of material model changes, and the respective model approval process.
The guide assists significant institutions directly supervised by ECB in their self-assessment of the materiality of changes and extensions to internal models used to calculate counterparty credit and credit valuation adjustment (CVA) risks of a business partner, drawing as much as possible on the approaches already defined by EBA for other risk types. Under the Capital Requirements Regulation (CRR), financial institutions can use the internal model method (IMM) for CCR and the advanced method for credit valuation adjustment risk (A-CVA) when calculating capital requirements. These internal models focus on over-the-counter derivatives contracts and securities finance transactions because, for these products, the exposure is calculated in a different way than for a traditional loan, where the exposure is, to a large extent, fixed. The output of these models is one input factor in the calculation of the Pillar 1 capital requirements of a bank. Changes and extensions to both methods require supervisory approval, when such changes or extensions are deemed material.
The implementation of the guide will be part of the day-to-day supervisory dialog with individual banks. A consultation on this guide ran from December 16, 2016 to February 14, 2017. The publication of this guide marks the end of the public consultation process on this.
Keywords: Europe, EU, Banking, CRR, CCR, A-CVA, Internal Models, ECB
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