ECB finalized the guide on assessment methodology for the internal model method for calculating exposure to counterparty credit risk (CCR) and the advanced method for own funds requirements for credit valuation adjustment (A-CVA) risk. Under European Union law, banks are allowed to use internal models to calculate the value of their exposures to CCR and CVA risk as long as these models meet regulatory requirements. This guide explains the ECB methodology to assess the validity of such models, especially in internal model investigations. ECB also published a feedback statement on the comments received during the consultation on the draft guide.
The guide is to be applied in the context of any CCR-related internal model investigation—before or after approval—and the ongoing monitoring of approved internal models. It outlines, for supervisors, how ECB intends to investigate compliance with the existing legal framework when performing these tasks. 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 provides optional guidance to significant institutions on the self-assessment of their internal model method and A-CVA models. The guide is also relevant when banks apply to extend or make changes to their models as well as for the ongoing monitoring of such models by ECB. 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.
Keywords: Europe, EU, Banking, Counterparty Credit Risk, IMM, Internal Models, Credit Valuation Adjustment, Regulatory Capital, OTC Derivatives, Credit Risk, CRR, A-CVA, Supervisory Assessment, ECB
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