On 24 March 2023, the European Banking Authority (EBA) published a Consultation Paper on draft Regulatory Technical Standards (RTS) on the assessment methodology under which Member State competent authorities (NCAs) verify an institution’s compliance with the internal models approach as per Article 32az(8) of the revised Capital Requirements Regulation (CRR).

One of the prerequisites for an institution to use the new internal model approach (IMA) for calculating its own funds requirements for market risk is the approval from its NCA. To obtain such an approval, the institution is subject to a thorough and comprehensive assessment of its internal model by the NCA to ensure it complies with the relevant regulatory provisions. The draft RTS are based on the mandate provided in Article 325az(8)(b) CRR, and set out the framework for NCAs to make their assessment. In particular, the draft RTS focus on three main aspects: governance, the internal risk-measurement model-covering the expected shortfall, and the stress scenario risk measure and the internal default risk model.

Among other things, the Consultation Paper notes that considering that risks stemming from climate change and broader environmental issues are changing the risk picture for the financial sector and are expected to become even more prominent going forward, the draft RTS proposed for consultation explicitly require NCAs to verify that institutions consider those risks in their stress testing programmes for internal models.

The deadline for comments to the Consultation Paper is 26 June 2023.