Refinement of the ECB guide to internal models

In October 2019, the European Central Bank (ECB) published the consolidated version of its guide to internal models. This includes general topics and chapters on credit, market and counterparty risks.

This guide draws on experience from the ECB’s targeted review of internal models (TRIM) initiative (which first started late 2015). The ECB TRIM initiative is designed to harmonise supervisory practices in the SSM with regards to internal models, to verify that such models are compliant with regulatory requirements, and to reduce unwarranted variability in capital requirements. This initiative involved the execution of about 200 internal model on-site investigations (IMIs) at 65 significant institutions across the SSM (Single Supervisory Mechanism) and is expected to conclude in early 2020.

In this report (PDF, 4.4mb), we focus on the main enhancements to the risk specific chapters of the guide, which includes:

• Credit risk – This chapter provides transparency on how the ECB understands topics related to internal models used for the internal ratings-based (IRB) approach for calculating own funds requirements.
• Market risk - This chapter provides transparency on how the ECB understands topics related to internal models used in the calculation of own funds requirement for market risk.
• Counterparty credit risk - The main purpose of this chapter is to provide transparency on how the ECB understands topics related to the principles defined for the Internal Model Method (IMM).

As highlighted in the SSM Supervisory Priorities 2020, work will continue on ensuring the adequacy of internal models used by banks in calculating their regulatory capital requirements. In this report, we discuss the main implications this could have on banks’ business models and capital and key recommendations going forward.

If you wish to discuss any of the findings in our report, please visit our KPMG ECB Office website.