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    ECB Consults on Assessment Methodology for Counterparty Credit Risk

    February 05, 2020

    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.


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    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

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