ECB guide to internal models

Frankfurt am Main, 28 July 2025

Frequently asked questions

What is the purpose of the ECB guide to internal models?

The ECB guide to internal models (“the guide”) helps achieve a major objective of ECB Banking Supervision: ensuring that high supervisory standards are applied consistently for directly supervised institutions and that the rules regarding the use of internal models are understood and applied in a consistent manner. These rules are laid down in Regulation (EU) No 575/2013 (Capital Requirements Regulation – CRR)^[1], as amended by Regulation (EU) 2019/876 (CRR2)^[2] and Regulation (EU) 2024/1623 (CRR3)^[3], as well as in the Commission delegated regulations dealing with internal models. The guide provides transparency on how the ECB understands the rules governing the internal models used by the institutions it directly supervises to compute own funds requirements for credit, market and counterparty credit risk.

What is the purpose of the different chapters of the ECB guide to internal models?

The chapter on overarching principles for internal models describes, in a clear and transparent manner, how the ECB aims to ensure a uniform understanding of the overarching (i.e. non-model-specific) principles relating to internal models that are applicable to all risk types (e.g. model risk management framework, data governance, use of machine learning techniques).

The risk-type-specific chapters of the guide (i.e. the chapters on credit risk, market risk (CRR2), market risk (CRR3) and counterparty credit risk) explain, in a precise and comprehensive way, how the ECB understands various aspects of the applicable regulations for each specific risk type.

The content of the guide is based on the requirements of the CRR. Each chapter expresses how the regulatory provisions of relevance to the topic in question are understood by the ECB when it reviews the internal models used by significant institutions. In each review, the ECB will take the specificities of each bank into consideration when applying the relevant framework.

The guide does not aim to cover exhaustively all topics related to the CRR requirements on the use of internal models for regulatory purposes.

What was the main reason for revising the ECB guide to internal models now?

Since its publication in October 2019, the guide has proven to be a very useful and welcome tool for banks and supervisors, as it provides transparency on the ECB’s expectations regarding the implementation of regulatory requirements for internal models.

The guide is designed as a dynamic document subject to regular updates to reflect potential changes in the regulatory environment, state-of-the-art supervisory expectations and refinements based on experience with its application.

A revised guide was already published on 19 February 2024: it clarified, among other things, how banks should include material climate-related risks in their models. It also provided detailed expectations for common definitions of default, default risk in the trading book, and information on how banks can return to the standardised approach. For counterparty credit risk, it covered risks not included in effective expected positive exposure.

The ECB saw a need for a new revision of the guide in 2025 because CRR3 (which entered into force on 1 January 2025) introduced several amendments in the context of internal models used to determine own funds requirements. The new revision also presents an opportunity to provide supervisory expectations on topics where the ECB deemed further clarification necessary, taking into account the perspectives, insights and demands of institutions: for instance, a new section has been included in the guide to provide expectations regarding the use of machine learning techniques in internal models, thereby addressing the need for clarification previously raised by the industry.

The ECB is confident that this revision will enhance the guide’s usefulness when implementing or supervising internal models, promoting greater consistency across institutions and strengthening their alignment with the regulatory requirements.

What are the main differences compared with the previous version of the ECB guide published in February 2024?

The revised guide published on 28 July 2025 has a new structure.

• A new chapter on overarching principles for internal models has been introduced, which replaces the general topics chapter.
• The credit risk chapter has been reorganised into sub-chapters covering general topics for credit risk, the definition of default and the estimation of credit risk parameters.
• A new chapter on internal models for market risk under CRR3 has been introduced while also keeping the chapter on internal models for market risk under CRR2.
• The counterparty credit risk chapter has been updated while keeping its structure.

The main changes to the actual content of each chapter of the guide are summarised below.

Overarching principles for internal models

This new chapter includes the subset of supervisory expectations from the former general topics chapter that are valid for internal models of all risk types.

The chapter also includes additional supervisory expectations in response to new regulatory provisions, observations from supervisory practises and some demands of institutions: Section 3 outlines supervisory expectations regarding data governance practices; and Section 9 introduces supervisory expectations regarding the use of machine learning techniques in internal models across all risk types, with a focus on governance, data maintenance, mathematical methods, explainability and model use.

Credit risk chapter

General topics for credit risk

This sub-chapter includes the subset of supervisory expectations from the former general topics chapter that are applicable to internal models for credit risk and are therefore better placed within the credit risk chapter.

The sub-chapter has also been updated to reflect the latest developments in regulatory requirements and supervisory expectations. Section 2 has been refined to ensure that the supervisory expectations regarding roll-out and permanent partial use are consistent with the new requirements outlined in Articles 148 and 150 of the CRR. Section 3 on internal governance introduces expectations concerning the responsibilities of senior management and the management body in relation to the readiness of applications for permission to use internal models. In Sections 4 and 5, the ECB’s expectations concerning internal validation and internal audit have been refined following the guidance provided in the European Banking Authority’s (EBA)’s supervisory handbook on the validation of internal ratings-based (IRB) rating systems.^[4]

Definition of default

The sub-chapter on the definition of default has been refined to further clarify the ECB’s understanding of the days past due (DPD) and unlikeliness to pay (UTP) criteria. In Section 10 on the DPD criterion, the ECB has further clarified its understanding of how the principal should be determined for specific loan products. In Section 11 on the UTP criterion, the ECB has clarified that additional UTP indications are expected to reflect the specificities of the underlying sources of repayment.

Estimation of credit risk parameters

The sub-chapter on the estimation of credit risk parameters has been refined to reflect the new CRR3 requirements. While the wording and legal references have been aligned accordingly, no substantial changes were needed in supervisory expectations, as these were confirmed in full except in the rare case of obvious discordance with the new CRR3 requirements (e.g. paragraphs on data weighting for retail calibration were removed as this is no longer allowed under CRR3).

In addition, in Section 16 on probability of default (PD), under PD risk quantification, the subsection on calibration to the long-run average default rate has been enhanced to clarify the ECB’s expectations regarding the determination of the historical period that is representative of the likely range of variability of one-year default rates. This includes providing principles for the identification of this period as well as a reference period considered best practice for benchmarking the calibration.

Furthermore, Section 17 has been updated to clarify the ECB’s expectations concerning loss given default (LGD) models based on components and concerning key aspects of downturn LGD, such as: (i) the level at which downturn LGD is calibrated, (ii) the calibration methodology used when the downturn LGD estimation is based on the observed impact, (iii) the calculation of the reference value, and (iv) how the reference value and the downturn LGD estimates should be compared.

Market risk chapters (CRR2 and CRR3)

A new chapter “Market risk – CRR3” has been introduced in the guide to cover supervisory expectations regarding CRR3 market risk models developed on the basis of draft supervisory expectations regarding the fundamental review of the trading book (FRTB) that were previously shared with institutions for feedback. The new chapter complements the already existing chapter “Market risk – CRR2” (previously “Market risk”), which is unchanged from the previous version of the guide.

The coexistence of these two chapters stems from the European Commission’s adoption on 24 July 2024 of a delegated act^[5] that delays the implementation of the Basel III FRTB standards in the EU by one year, now set for 1 January 2026, and from the no-action letter issued by the EBA on 12 August 2024 concerning the boundary between the banking book and the trading book.^[6] As a result, some banks will continue to use their current market risk models for calculating own funds requirements, while others have already applied for the new FRTB models under CRR3. Hence, the two chapters are needed to clarify supervisory expectations for both types of market risk models. The chapter “Market risk – CRR2” will cease to be relevant once own funds requirements are calculated using CRR3 market risk models. The ECB will monitor developments in the EU regarding the implementation of market risk rules for banks and update this Guide or issue additional guidance accordingly.^[7]

Counterparty credit risk chapter

The counterparty credit risk chapter has been updated to clarify the ECB’s view on the modelling of exposure changes of margined trading within the margin period of risk regarding the payment of trade-related cash flows that are possible due to the default management process and contractual requirements but are not compensated by margin calls. Furthermore, Section 6 on maturity has been updated to reflect changes in Article 162 introduced by CRR3.

How does the revision of the guide interplay with the targeted IRB model landscape of institutions?

CRR3 introduced some key changes affecting the IRB model landscapes of institutions: (i) there is more flexibility regarding the adoption of the IRB approach for institutions, as approvals for IRB models are now provided at exposure class level (rather than at institution level as previously under CRR2), (ii) models for equity exposures and models for own estimates of LGD for exposures to banks and large corporates are discontinued.

In light of the above-mentioned changes, the EBA expects institutions to discuss with their competent authorities their targeted model landscape under CRR3 and, in this respect, the ECB reiterates its encouragement to institutions to make further efforts to streamline their sometimes highly complex model landscapes, making use of the available supervisory framework to obtain permission to use less sophisticated approaches and taking account of the new temporary provisions on this matter set out in Article 494d of the CRR.^[8][9]

The revision of the guide is not at odds with the streamlining of the targeted IRB model landscapes of significant institutions. Rather, as the guide offers enhanced clarity on expectations for the use of internal models, institutions can more effectively determine which portfolios are suitable for internal models and consider applying less sophisticated approaches to others.

Why did the ECB decide not to carry out a public consultation prior to the release of the revised guide?

In the frequently asked questions published on 19 February 2024, the ECB remarked that future updates of the guide may be released without a prior public consultation.^[10] Instead of a public consultation, the ECB hosted virtual “roundtables” on selected topics during the fourth quarter of 2024 to inform banks about the main elements of the intended revision and collect their feedback. The feedback received was carefully assessed and led to some adjustments that are reflected in the latest version of the guide. Following a change in the relevant regulatory requirements, this allowed the ECB to publish an updated guide in a timelier manner.

Will the guide be further updated in the future?

Yes. Some parts of the guide may require revision or expansion, for example if the supervisory criteria or regulatory requirements change. In particular, as CRR3 mandated the EBA to develop and review several guidelines and regulatory technical standards concerning internal models, updates to the guide may become necessary when new guidelines are finalised by the EBA or new regulatory technical standards are adopted by the European Commission. The ECB will assess the most effective way to engage with the industry in the context of future updates of the guide.