ECB streamlines how it supervises banks' internal models

The European Central Bank (ECB) has announced changes to streamline the supervision of banks' internal models for credit risk, aimed at making the approval process for material model changes faster and more predictable while maintaining prudential safeguards. From 1 October, banks will be permitted to implement material changes to their internal models for credit risk shortly after submitting a complete application package. This will allow banks to implement model changes quickly, without having to maintain old and new models in parallel while awaiting supervisory review. This is subject to confirmation by the bank's internal control function that the revised model complies with regulatory requirements and that the bank is ready to implement the change. Where changes lead to lower risk weights, expedited approval will still apply, but any capital benefit will be capped by a supervisory floor applied to all approved model changes, and only lifted once the ECB completes a targeted on site review. The ECB will retain the option to apply the standard approval process in higher risk or sensitive cases, with banks waiting for the outcome of a dedicated on site investigation. Material model changes will no longer automatically trigger an on-site investigation. On the same day, the EBA also published final draft regulatory technical standards amending the framework for assessing the materiality of changes to internal ratings based models.

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