EU Banking Regulation: ECB updates Guide to Internal Models
On February 19, 2024, the European Central Bank (ECB) published its final revised guide to internal models for credit risk, counterparty credit risk, and market risk. The guide aims to clarify the rules for banks using internal models.
Internal models are statistical models that banks may choose (subject to regulatory approval) to determine their capital requirements. Banks must meet certain conditions to use internal models, and they also have the option to use the standardized approach set by regulators.
The revised guide clarifies:
How banks should include material climate-related and environmental risks in their models.
How to revert to the standardised approach for calculating their risk-weighted assets specifically on credit risk. The guide also provides clarifications regarding counterparty credit risk.
How to measure default risk in trading book positions.
source: ECBECB - Press release
ECB - Final Revised Guide to Internal Models
ECB - FAQ
Also of interest:
ECB - Guide to onsite inspections and internal model Investigations
This revised guide does not account for the upcoming changes expected with the forthcoming entry into force of the new regulatory texts for CRD6/CRR3 and the Fundamental Review of the Trading Book. Interested in learning more about CRD6 and CRR3? Read this informative blog: ”Upcoming Changes in EU Banking: CRD 6/CRR 3 Explained”
