On September 7, 2018, the European Central Bank (ECB) published its new Guide to Internal Models1. The guide, which applies to European Union (EU)-based banks, consists of separate chapters on Credit Risk, Market Risk and Counterparty Credit Risk used to calculate regulatory capital for banks. These topics were discussed earlier in the ECB’s Targeted Review of Internal Models (TRIM), so the new guide can be viewed as a revised version of the TRIM guidelines.2
This new guide sets the ECB’s supervisory expectations for modelling approaches such as the Internal Ratings-Based (IRB) method for credit risk, the Internal Model Approach (IMA) for market risk and the Internal Model Method (IMM) for counterparty credit risk. The guide is not a standalone document. In particular, it refers to complementary EU regulatory initiatives such as the Capital Requirements Regulation (CRR)3. It also has been drafted in such a way as to be consistent with the Basel Committee’s Fundamental Review of the Trading Book (FRTB) for Market Risk4.
The ECB has simultaneously launched a public consultation into the modelling principles set out in the guide. The consultation period lasts until November 7, 2018, during which feedback is invited from market participants. All comments will be published by the ECB, along with the ECB’s replies, and a public hearing will be held on October 17, 2018, as part of their consultation process.