Internal model investigations (IMIs) aim to assess whether the internal models used by banks to calculate capital requirements are compliant with legal requirements. They can be triggered at the request of a bank (initial approval, material changes, extensions, roll-out, permanent partial use or reversion to less sophisticated approaches) or initiated by the ECB.
Decisions relating to the use of internal models are drafted once an investigation has been completed. Before they can become final, decisions must be endorsed by the Supervisory Board and adopted by the ECB’s Governing Council under the non-objection procedure.
The ECB’s Guide to on-site inspections and internal model investigations clarifies the general framework and process applicable to IMIs.
It is complemented by the ECB’s Guide to internal models, which focuses on the content of the investigations (see section below).
IMIs assess whether a bank meets the requirements for using internal models. In particular, IMIs:
At the start of the preparatory phase of an IMI, the availability and readiness of all parties involved must be confirmed (see also the section on Submitting requests related to internal models).
The process for the investigation itself is depicted in the graphic below (for a detailed description of the process, see the Guide to on-site inspections and internal model investigations).
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 on-site IMIs that the ECB has developed as part of the TRIM. It thus makes a significant contribution to harmonising supervisory practices across the SSM and, ultimately, to creating a level playing field for significant institutions using internal models.
The ECB Guide to internal models is composed of four chapters (general topics, credit risk, market risk and counterparty credit risk), which were subject to public consultation in 2018.
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.
In order to facilitate a consistent approach for requests related to internal models across the SSM, ECB Banking Supervision has published a set of documents and processes that significant banks are invited to use when sending applications to the ECB that relate to internal models.
Forms and guidelines relating to the (pre-)application process are provided below, together with links to the set of documents that should be used to inform the ECB of any non-material model changes or extensions, whether these are being planned or have already been implemented.
Banks seeking initial model approval, or a material model change or extension which is not due to the fulfilment of a previous obligation, are requested to:
The Capital Requirements Regulation stipulates that the competent authority must approve material model extensions and changes to credit, operational and market risk internal models. Regulatory technical standards (RTS) have been adopted by the European Commission for the materiality assessment of model extensions and changes to the internal ratings-based approach for credit risk, the advanced measurement approach (AMA) for operational risk and the internal models approach for market risk. Based on these RTS, model extensions and changes to internal models are categorised either as material extensions and changes that require prior approval from the competent authority or as extensions and changes that are not material and require either ex ante or ex post notification.
For counterparty credit risk for both the internal model method (IMM) and the advanced method for credit valuation adjustment risk (A-CVA), the adoption of similar RTS is not mandated by the current text of the Capital Requirements Regulation. The ECB therefore published a Guide on materiality assessment (EGMA) which provides assistance to significant institutions in their self-assessment of the materiality of changes and extensions to IMM and A-CVA models under the applicable legal framework. The EGMA is not intended to replace, overrule or affect in any other way applicable EU and national law. Moreover, it should be borne in mind that the EBA may regulate this field by adopting guidelines on the basis of Article 16 of the EBA Regulation, or by adopting RTS based on future EU legislation.