ECB Consults on Risk-Specific Chapters of Guide to Internal Models
ECB is consulting on the credit risk, market risk, and counterparty credit risk chapters of its guide to internal models for banks. The chapters on specific risk-types focus on providing transparency about the way ECB understands the applicable regulations for using internal models to calculate own fund requirements for credit risk, market risk, and counterparty credit risk. The consultation ends on November 07, 2018. ECB also published frequently asked questions (FAQs) on the ECB guide on specific risk-types.
The content of each chapter of the ECB guide is based on the requirements of the Capital Requirements Regulation, or CRR, (Regulation No 575/2013). Each chapter in the consultation expresses how the regulatory provisions of relevance to the topic in question are understood by ECB when it reviews the internal models used by institutions to calculate their own funds requirements. The following key topics have been covered in each chapter:
- The credit risk chapter covers selected topics regarding the internal ratings-based approach for calculating own funds requirements, including an initial section covering data maintenance for this approach followed by specific modeling aspects related to the estimation of probability of default (PD), loss given default (LGD), and conversion factor (CCF).
- Regarding the market risk chapter, the selected topics focus on specific modeling aspects related to back-testing of value-at-risk (VaR) models, VaR and stressed VaR methodologies, incremental risk charge methodology, and a framework for risks not captured in the model engines (known as RNIME).
- The counterparty credit risk chapter outlines ECB’s understanding of the regulatory requirements defined for the Internal Model Method, as referred to in Part Three, Title II, Chapter 6, Section 6 of CRR
The general topics chapter of this guide was published for consultation on March 28, 2018. ECB takes the specificities of each bank into consideration when applying the relevant framework. Certain articles of the Capital Requirements Regulation, or CRR, (Regulation No 575/2013) require ECB to grant permission to use internal models for credit risk, counterparty credit risk, and market risk, where the requirements set out in the corresponding chapters of the CRR are met by the institutions concerned. The guide was drafted in close cooperation with the national competent authorities and draws on the experience gained from on-site investigations in the context of the targeted review of internal models (TRIM) project in 2017 and 2018. It also draws on the feedback received from institutions on a first version of the guide that was made available on February 28, 2017.
Related Links
Comment Due Date: November 07, 2018
Keywords: Europe, EU, Banking, Internal Models, TRIM, Credit Risk, Market Risk, Counterparty Credit Risk, CRR, ECB
Previous Article
FSB Publishes List of Global Systemically Important Banks for 2019Related Articles
BIS and Central Banks Experiment with GenAI to Assess Climate Risks
A recent report from the Bank for International Settlements (BIS) Innovation Hub details Project Gaia, a collaboration between the BIS Innovation Hub Eurosystem Center and certain central banks in Europe
Nearly 25% G-SIBs Commit to Adopting TNFD Nature-Related Disclosures
Nature-related risks are increasing in severity and frequency, affecting businesses, capital providers, financial systems, and economies.
Singapore to Mandate Climate Disclosures from FY2025
Singapore recently took a significant step toward turning climate ambition into action, with the introduction of mandatory climate-related disclosures for listed and large non-listed companies
SEC Finalizes Climate-Related Disclosures Rule
The U.S. Securities and Exchange Commission (SEC) has finalized the long-awaited rule that mandates climate-related disclosures for domestic and foreign publicly listed companies in the U.S.
EBA Proposes Standards Related to Standardized Credit Risk Approach
The European Banking Authority (EBA) has been taking significant steps toward implementing the Basel III framework and strengthening the regulatory framework for credit institutions in the EU
US Regulators Release Stress Test Scenarios for Banks
The U.S. regulators recently released baseline and severely adverse scenarios, along with other details, for stress testing the banks in 2024. The relevant U.S. banking regulators are the Federal Reserve Bank (FED), the Federal Deposit Insurance Corporation (FDIC), and the Office of the Comptroller of the Currency (OCC).
Asian Governments Aim for Interoperability in AI Governance Frameworks
The regulatory landscape for artificial intelligence (AI), including the generative kind, is evolving rapidly, with governments and regulators aiming to address the challenges and opportunities presented by this transformative technology.
EBA Proposes Operational Risk Standards Under Final Basel III Package
The European Union (EU) has been working on the final elements of Basel III standards, with endorsement of the Banking Package and the publication of the European Banking Authority (EBA) roadmap on Basel III implementation in December 2023.
EFRAG Proposes XBRL Taxonomy and Standard for Listed SMEs Under ESRS
The European Financial Reporting Advisory Group (EFRAG), which plays a crucial role in shaping corporate reporting standards in European Union (EU), is seeking comments, until May 21, 2024, on the Exposure Draft ESRS for listed SMEs.
ECB to Expand Climate Change Work in 2024-2025
Banking regulators worldwide are increasingly focusing on addressing, monitoring, and supervising the institutions' exposure to climate and environmental risks.