On 8 July 2019, the European Central Bank (ECB) published finalised chapters to its guide to internal models covering credit risk, market risk and counterparty credit risk. These risk type-specific chapters complement earlier chapters on general topics such as internal governance and audit.
Articles 143, 283 and 363 of the Capital Requirements Regulation (CRR) require the ECB to grant permission to use internal models for credit risk, counterparty credit risk and market risk where the requirements set out in the corresponding chapters of the CRR are met by the institutions concerned. The ECB guide to internal models provides transparency on how the ECB understands these requirements and how it intends to apply them when assessing whether institutions meet them. The guide is also intended as a document for the internal use of different ECB supervisory teams, with the aim of ensuring a common and consistent approach to matters related to internal models.
The chapter on credit risk deals with how the ECB understands a number of topics related to internal models used for the internal ratings-based approach, including an initial section covering data maintenance for this approach.
The chapter on market risk provides information on how the ECB understands a number of topics related to internal models used in the calculation of own funds requirements for market risk. The topics covered in the chapter have been selected taking into account the requirements of the CRR and focus on certain modelling aspects relating, for example, to regulatory back-testing of value at risk (VaR) models, to VaR and stressed VaR methodologies, and to the incremental default and migration risk charge methodology.
The purpose of the chapter on counterparty credit risk is to provide transparency on how the ECB understands a number of topics related to the principles defined for the internal model method.