ECB published final chapters of the guide to bank internal models, covering the market, credit and counterparty credit risks. The chapters on specific risk types provide transparency on how ECB understands regulations on the use of internal models to calculate own funds requirements for market, credit and counterparty credit risks. ECB had conducted a consultation on the chapters on specific risk types of the guide, which ended in November 2018. Post the consultation, ECB also published a feedback statement and the comments received from the industry.
The content of each chapter of the ECB guide is based on the requirements of the Capital Requirements Regulation or CRR (575/2013). The following chapters on specific risk-types are intended to ensure a common and consistent approach to the most relevant aspects of the regulations on internal models for banks directly supervised by ECB:
- The credit risk chapter helps to provide transparency on how ECB understands a number of topics related to internal models used for the internal ratings-based approach, including an initial section covering data maintenance for this approach. On these selected topics, the chapter is aligned with 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 CRR.
The guide was drafted in close cooperation with the national competent authorities and draws on experience gained in the context of the targeted review of internal models (TRIM) project. TRIM is a multi-year project that aims to make the implementation of internal models more consistent. It is essential to creating a level playing field for banks under ECB supervision.
- Press Release
- Guide to Internal Models (PDF)
- Feedback Statement on Consultation (PDF)
- Overview of Consultation and Related Documents
Keywords: Europe, EU, Banking, Internal Models, TRIM, Credit Risk, Market Risk, Counterparty Credit Risk, CRR, ECB
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