The objective of ongoing model monitoring (OMM) is to verify an institution’s ongoing compliance with the regulatory requirements for internal models used to calculate the bank’s minimum capital requirements.
The competent authority assesses, on an ongoing basis, whether the institution uses well-developed and up-to-date internal model techniques.
Typical OMM activities include:
OMM is mainly performed by the JSTs. Instructions and templates are generally provided by the JSTs to the banks (e.g. for market risk back-testing results and time series), or are prescribed by EBA Implementing Technical Standards (e.g. for credit risk and market risk benchmarking exercises). Further details on validation reporting are provided in the next section.
Internal validation plays a key role in the assessment of the reliability and accuracy of significant institutions’ internal models. It also serves as an important input for the ECB’s assessment of the regulatory compliance of internal models.
To ensure a level playing field, the ECB now requires significant institutions to provide specific data on the validation of internal models used to calculate own funds requirements for credit risk and operational risk. Rather than replacing institutions’ own internal validation processes, this data collection establishes a common minimum set of metrics which are to be submitted to the ECB on an annual basis along with institutions’ internal validation reports.
Significant institutions that have permission to use the internal ratings-based approach to calculate their own funds requirements for credit risk are required by the ECB to provide information on their probability of default, loss given default and credit conversion factor models, and on the slotting approach they apply to specialised lending exposures. This reporting involves statistical measures and tests similar to those typically used by such institutions, which are to be conducted on a standardised set of validation samples.
Significant institutions that have permission to use the AMA to calculate their own funds requirements for operational risk are required by the ECB to provide information on the design and performance of their AMA model. This reporting includes capital figures and results of statistical tests on the inputs and outputs of the AMA model and on modelling assumptions. Furthermore, loss data and the input data needed to calculate the future standardised approach, as proposed by the Basel Committee on Banking Supervision, are also to be reported.
All related documents are provided below, together with the respective templates that are to be filled in and submitted to the ECB by significant institutions.