July 28, 2025
- The revised guide reflects updates to regulatory requirements under CRR3, including the revised Basel framework
- The use of machine learning technology in internal models has become clear
- Improved transparency and harmony in the supervision of internal models
The European Central Bank (ECB) today publishes a revised guide to its internal model. This revision incorporates an update to the regulatory framework and builds on the ECB's years of experience overseeing internal models.
Since its first published in October 2019, the guide has proven to be a very useful and highly regarded tool for credit institutions and supervisors. The revised version provides transparency in the understanding of the ECB of the most important aspects of the applicable regulatory framework that governs the internal models that banks use for credit, market, and counterparty credit risk.
Some of the major changes to the revised guide include:
- Machine Learning: A new section, part of the rebranded chapter on “Comprehensive Principles of Internal Models,” specifies the expectations for the use of machine learning technologies in internal models that address the need for clarification previously raised by the industry. The aim is to ensure that models using these techniques are well explained and that their performance justifies complexity.
- Credit risk: The credit risk chapter includes updates on rollouts and permanent partial use tailored to CRR3 requirements, sophisticated expectations for internal verification and internal audits, and internal audits in line with the EBA's supervisory handbook on the verification of internal assessment-based (IRB) rating systems, and clarification of the management body's responsibility for senior management and ECB responsibility. It also improves expectations regarding default definitions and credit risk parameters estimation, particularly default (PD) risk quantification and loss risk quantification of default (LGD) models.
- Market risk: This topic is split into two chapters to present supervisory expectations for market risk models based on both CRR2 and CRR3. This reflects the decision of the two European Commissions to delay the implementation of the New Basel Standards Act until the beginning of 2026, and will then be further delayed until the start of 2027, which will be subject to European Parliament and three-month period of oversight.
- Counterparty credit risk: This chapter contains details on how to model transaction risk with partners, changes in exposure, and updates on maturities in line with CRR3.
The revised guide has been developed in collaboration with experts from national authorities and benefits from industry feedback collected through two targeted stakeholder consultations.
The ECB hopes that this revision will improve the effectiveness and usefulness of the guide for the implementation and supervision of the internal model. This revision will allow institutions to streamline the landscape of their models, better select the right portfolio for their internal models, and apply a simple approach to others. In this stream, revisions to the guides are consistent with ongoing initiatives on model simplification, but rather support them further.
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Note
- The use of an internal model for banks to calculate risk-weighted assets is subject to initial approval by ECB Bank supervisory. The internal model of the bank is subject to continued model monitoring by the investigation of the internal model and supervision of the ECB bank.
- As of June 2024, approximately 60% of the risk-weighted exposures of banks' credit risks directly supervised by the ECB (critical bank) was calculated using an internal model and approximately 40% using a standardized approach. Overall, credit risk accounted for around 83% of the total risk-weighted exposures of key banks, reaching 7.5 trillion euros.
- ECB first developed a guide to internal models as part of the target review of Internal Model Target Review (TRIM), a large-scale project to address conflicts caused by the use of complex internal models and reduce unfair variability in output.
- The Capital Requirements Rules (CRR) provide for the calculation of risk-weighted assets for credit, market and operational risks that form the basis for minimum capital requirements and regulatory capital ratios (see the dedicated explanatory page).
