ECB Completes Targeted Review of Internal Models of Banks
ECB published the results of the assessment of internal models that banks use to calculate risk-weighted assets for credit, market, and counterparty credit risks. This targeted review of internal models, or TRIM, is aimed to ensure that banks comply with rules and implement internal models consistently. The review confirmed that the internal models of significant institutions can continue to be used for the calculation of own funds requirements, provided they remediate the identified shortcomings within the given deadlines—that is, they restore full compliance with legal requirements. In the future, banks will need to continue to invest in high-quality models and, thus, it is particularly important that banks further strengthen their internal validation function.
The review also concludes that further efforts and investments are expected to support institutions in deciding on their model strategies. Defining these internal model strategies will support institutions in the decision on the optimal use of time and resources invested in model development and maintenance and may lead to simplifications in the current model landscapes, as part of the preparation for upcoming regulatory developments. These developments foresee the decommissioning of some existing models—or to the corresponding necessary improvements also for some less material or less critical models. Going forward the positive experience and wealth of results from TRIM will bring long-lasting and sustainable benefits beyond the project itself, not least by helping institutions to be better prepared to face current and future challenges related either to economic shocks or to the adaptation of existing models to regulatory developments. The implementation of Basel III standards, through the amendments to the Capital Requirements Regulation (CRR), the regulatory review of the internal ratings-based approach led by EBA and the remediation of TRIM findings should provide complementary layers of safeguarding against inadequate internal models. Good internal models help to measure risk appropriately, thus better preparing banks to react and answer to economic shocks like the COVID-19 pandemic.
The TRIM was a multi-year project launched by ECB at the beginning of 2016, in close cooperation with the national competent authorities that are part of European banking supervision. TRIM aimed to assess whether the Pillar I internal models used by significant institutions within the Single Supervisory Mechanism (SSM) are appropriate in the light of the applicable regulatory requirements and whether their results are reliable and comparable. Furthermore, TRIM aimed to harmonize supervisory practices for internal models in the SSM. With 200 on-site investigations conducted at 65 significant banks using internal models, TRIM is the largest project ever carried out by the ECB Banking Supervision. The findings communicated within TRIM have been followed up with binding supervisory decisions requesting the institutions to address these shortcomings. ECB identified over 5,000 findings and issued binding supervisory measures for banks to take corrective action within given deadlines. Through such measures, TRIM resulted in a 12% increase, or about EUR 275 billion, of risk-weighted assets for the investigated models.
Related Links
Keywords: Europe, EU, Banking, TRIM, Internal Models, Credit Risk, Market Risk, SSM, Counterparty Credit Risk, Regulatory Capital, Basel, SSM, 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.
Trevor Howes
IFRS 17 technical advisor; AXIS actuarial modeling system expert; extensive experience in life insurance and life reinsurance, with focus on modeling, valuation, and financial reporting
Related Articles
EBA Proposes Standards for IRRBB Reporting Under Basel Framework
The European Banking Authority (EBA) proposed implementing technical standards on the interest rate risk in the banking book (IRRBB) reporting requirements, with the comment period ending on May 02, 2023.
FED Issues Further Details on Pilot Climate Scenario Analysis Exercise
The U.S. Federal Reserve Board (FED) set out details of the pilot climate scenario analysis exercise to be conducted among the six largest U.S. bank holding companies.
US Agencies Issue Several Regulatory and Reporting Updates
The Board of Governors of the Federal Reserve System (FED) adopted the final rule on Adjustable Interest Rate (LIBOR) Act.
ECB Issues Multiple Reports and Regulatory Updates for Banks
The European Central Bank (ECB) published an updated list of supervised entities, a report on the supervision of less significant institutions (LSIs), a statement on macro-prudential policy.
HKMA Keeps List of D-SIBs Unchanged, Makes Other Announcements
The Hong Kong Monetary Authority (HKMA) published a circular on the prudential treatment of crypto-asset exposures, an update on the status of transition to new interest rate benchmarks.
EU Issues FAQs on Taxonomy Regulation, Rules Under CRD, FICOD and SFDR
The European Commission (EC) adopted the standards addressing supervisory reporting of risk concentrations and intra-group transactions, benchmarking of internal approaches, and authorization of credit institutions.
CBIRC Revises Measures on Corporate Governance Supervision
The China Banking and Insurance Regulatory Commission (CBIRC) issued rules to manage the risk of off-balance sheet business of commercial banks and rules on corporate governance of financial institutions.
HKMA Publications Address Sustainability Issues in Financial Sector
The Hong Kong Monetary Authority (HKMA) made announcements to address sustainability issues in the financial sector.
EBA Updates Address Basel and NPL Requirements for Banks
The European Banking Authority (EBA) published regulatory standards on identification of a group of connected clients (GCC) as well as updated the lists of identified financial conglomerates.
ESMA Publishes 2022 ESEF XBRL Taxonomy and Conformance Suite
The General Board of the European Systemic Risk Board (ESRB), at its December meeting, issued an updated risk assessment via the quarterly risk dashboard and held discussions on key policy priorities to address the systemic risks in the European Union.
