16 November 2018

ECB guide to internal models

This guide should not be construed as going beyond the current existing applicable EU and national law and therefore is not intended to replace, overrule or affect applicable EU and national law.

In accordance with the requirements set out in the CRR, the European Banking Authority (EBA) has drafted regulatory technical standards (RTS), namely the Final Draft RTS on assessment methodology for Internal Ratings-based (IRB) Approach, that specify how competent authorities should assess compliance with the IRB framework. The Final Draft RTS have not yet been adopted by the European Commission, but their provisions are referred to in this guide as good practices for interpretative purposes. Some parts of the guide may require revision once the European Commission has adopted the RTS by means of a Delegated Regulation. The ECB will amend or delete those parts of the guide when the RTS enter into force.

Within this guide, the chapter on general topics provides transparency on how the ECB understands the general (i.e. non-model-specific) topics for internal models, in particular for the IRB approach. While section 2 (overarching principles for internal models) covers all Pillar 1 internal models for credit, market and counterparty credit risk (unless stated otherwise), all subsequent sections (implementation of the IRB approach, internal governance, internal validation, internal audit, model use, model change management and third-party involvement) only cover credit risk Pillar 1 models (IRB approach). All other models, including operational risk models, Pillar 2 and managerial models are not included in the scope of the guide, unless otherwise mentioned.

The guide is also intended as a document for the internal use of the different supervisory teams, with the aim of ensuring a common and consistent approach to matters related to internal models. When applying the relevant regulatory framework in specific cases, the ECB will take into due consideration the particular circumstances of the institution concerned.

The first version of the guide was made available on 28 February 2017 and the general topics chapter was published for public consultation on 28 March 2018. It has been refined on the basis of the feedback received from the industry, also taking into account the outcomes of the reviews (questionnaires and on-site supervisory visits) and horizontal analyses performed as part of the targeted review of internal models (TRIM) project.

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