ECB updates Guide to internal models

February 19, 2024

• The ECB publishes the revised final guidance on internal models, covering general topics, credit risk, market risk and counterparty credit risk
• A guide clarifies how the ECB understands the rules on banks' internal models
• Review of accounts for climate-related risks, detailed requirements for common definitions of default, counterparty credit risk, default risk in the trading book and how to return to the standardized approach.

The European Central Bank (ECB) today published its revised final report Guide to internal models.following a Public consultation which ended in September 2023.

The ECB has taken due account of the 625 comments received from 20 respondents during the public consultation. These comments helped to further clarify the Guide, once again confirming the benefits of public consultations. The ECB has today published a feedback statement providing an overview of the comments received and the evaluation of those comments by the ECB.

The Guide explains how the ECB understands the rules that banks must follow when using internal models. Supervisors verify compliance with these rules. With the permission of the ECB, banks can use their own internal models to calculate their risk-weighted assets, which reflect the risks that banks have on their books and serve as a basis for calculating minimum regulatory requirements.

The Guidance revisions clarify how banks should include material climate and environmental risks in their models. They also outline how banks can return to a standardized approach to calculating risk-weighted assets, which could help support banks' efforts to simplify their internal models. Specifically with regard to credit risk, the Guidance helps all banks move towards a common definition of default and a consistent treatment of “mass disposals” (mass sales of non-performing loans). The updated market risk chapter details how to measure default risk on trading book positions. The revised Guidance also provides clarification on counterparty credit risk, which is the risk that the counterparty to a transaction may default. You can find more information at Frequent questions.

The revised Guidance, a statement on the public consultation and comments received from the sector are available on the ECB's banking supervision website.

For media inquiries, please contact François Peyratouttel.: +49 172 8632 119.

Grades

• A bank's use of internal models to calculate risk-weighted assets is first subject to initial approval by ECB Banking Supervision. Banks' internal models are then subject to internal model investigations and continuous model monitoring by ECB Banking Supervision. This is how supervisors check whether the bank continues to meet the requirements to use internal models.
• The ECB originally developed the Guide to Internal Models as part of its Targeted Review of Internal Models (TRIM), a unique, large-scale project to address inconsistencies resulting from the use of complex internal models and reduce the (risk-based) variability of the products.