November 15, 2018

ECB published the first chapter of its guide to internal models for banks, following a public consultation. Also published was a feedback statement to the responses received on the consultation, which ended on May 28, 2018. Articles 143, 283, and 363 of the Capital Requirements Regulation (CRR) require ECB to grant permission to use internal models for credit risk, counterparty credit risk (CCR), and market risk, where the requirements set out in the corresponding chapters of the CRR are met by the institutions concerned. This guide provides transparency on the ECB’s understanding of the most relevant aspects of the applicable regulations on internal models, for the institutions it directly supervises.

The first chapter of the guide covers general topics. It contains principles for non-model-specific topics, particularly the internal ratings-based (IRB) approach, including overarching principles for internal models, implementation of the IRB approach, internal model governance, internal validation, internal audit, model use, model change management, and third-party involvement. The consolidated version of the complete and revised ECB guide will also include model-specific chapters for credit, market, and counterparty credit risks. ECB launched a public consultation on risk-specific chapters and the consultation ran from September 07 to November 07, 2018.

The guide was drafted in close cooperation with the national competent authorities and draws on the experience gained in the context of the targeted review of internal models (TRIM) project. A preliminary version of the guide was made available on February 28, 2017 and has been refined on the basis of the feedback received from institutions. This revised version also takes into account the outcomes of the reviews and horizontal analyses on general topics performed as part of the TRIM project. The guide is intended to ensure a common and consistent approach to the most relevant aspects of the applicable regulation on internal models for banks directly supervised by ECB.

 

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Keywords: Europe, EU, Banking, TRIM, IRB Approach, Credit Risk, Internal Models, CRR, ECB

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