Internal models

Banks may use internal models to estimate their own funds requirements – i.e. the minimum amount of capital they must hold by law – provided they have prior authorisation from the competent authority. Within the Single Supervisory Mechanism (SSM), the ECB is the competent authority for all banks classified as significant institutions, while banks classified as less significant institutions are directly supervised by the national competent authorities.

Supervision. Explained. What are internal models?

The supervision of internal models used by significant institutions is based on current applicable EU and national law, including:

• the Capital Requirements Regulation
• the relevant regulatory technical standards of the European Banking Authority (EBA)
• EBA guidelines with which the ECB has announced its intention to comply

It relies on two pillars:

1. internal model investigations (IMIs)
2. ongoing model monitoring (OMM)

They benefit from the work conducted within the targeted review of internal models (TRIM) from 2016 to 2021 and the ECB guide to internal models. The guide is one of the key deliverables of the TRIM project. The main results and conclusions from the TRIM exercise are summarised in the TRIM project report.

ECB guide to internal models

The ECB guide to internal models provides transparency on how the ECB understands current applicable EU and national law and how it intends to apply this when assessing whether banks meet legal requirements. Initially developed in the context of TRIM, the guide is the backbone of the methodology for internal model supervision. It thus contributes significantly to harmonising supervisory practices across European banking supervision. This ultimately helps to create a level playing field for significant institutions using internal models.

The guide should not be construed as going beyond current applicable EU and national law and therefore is not intended to replace, overrule or affect applicable EU and national law.

ECB guide to internal models

TRIM project report

The TRIM project report marks the completion of the TRIM project and presents its accomplishments, findings, supervisory follow-up and the impact on internal model supervision. TRIM increased the consistency of the implementation of regulatory requirements and thus reduced unwarranted variability when banks use internal models to calculate their risk-weighted assets. Moreover, it fostered further development of a consistent approach to the supervision of internal models. The ECB guide to internal models was also published as a result of the TRIM project.

TRIM project report FAQ on the targeted review of internal models

TRIM was a large-scale project conducted by the ECB in close cooperation with the national competent authorities between 2016 and 2021. It combined detailed methodological work with 200 on-site internal model investigations at 65 institutions directly supervised by the ECB. It covered internal models for credit risk, market risk and counterparty credit risk.