Ongoing model monitoring
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:
- an assessment of an institution’s compliance with supervisory measures imposed in ECB decisions, as well as a bank’s compliance with implementation plans and with any other supervisory measures pertaining to the model which have been imposed on the institution
- an analysis of banks’ model validation results for internal credit risk models, and of back-testing results and time series for internal market risk models
- an assessment of the outcomes of the annual EBA benchmarking exercise for market risk and credit risk internal models
- an assessment of non-material model changes and extensions
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.
Validation reporting on internal models
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 requires significant institutions to provide specific data on the validation of internal models used to calculate own funds requirements for credit 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.
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.