Guide to the Targeted Review of Internal Models (TRIM) – General aspects

European Central Bank (ECB)

In February 2017, the ECB issued a Guide to the TRIM addressed to the management of significant institutions, which sets out its view on the appropriate supervisory practices and spells out how the ECB intends to interpret the relevant EU law on internal models and on general model governance topics. The Guide to the TRIM covers four main chapters: general topics, credit risk, market risk, and counterparty credit risk (CCR).

Moreover, it should be highlighted that the section on overarching principles for internal models covers all Pillar 1 internal models regarding credit risk, market risk and CCR (unless stated otherwise), whereas all subsequent sections only cover credit risk Pillar 1 models. All other models, including operational risk models, Pillar 2 and managerial models are not included in the scope of this Guide, unless otherwise mentioned.


Guide for the TRIM general topics

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In this context, following the consultation launched in March 2018, the ECB published a Guide to internal models in November 2018, which covers the update of the first chapter of the Guide to the TRIM.

This Technical Note summarises the ECB’s first chapter for the Guide to the TRIM, regarding the general topics.

Resumen ejecutivo

In November 2018 the ECB published a Guide to the TRIM which covers the final update of the first chapter on general aspects of the previous version of the Guide to the TRIM. In particular, the updated chapter provides transparency on how the ECB understand the general (i.e. non-model-specific) topics for internal models, in particular for the IRB approach.

Area of application:

The Guide to the TRIM is applicable to significant institutions .

Main content:

  • Overarching principles. They are subject to supervisory approval for the calculation of own funds requirements for credit, market and counterparty credit risk (Pillar 1 models).
  • Roll-out and permanent partial use. The CRR and the Final Draft RTS on assessment methodology for IRB have established several GL and criteria for application, monitoring and assessment of the IRB approach.
  • Internal governance. They are organised along the following lines: i) the materiality of rating systems; ii) the management body and senior management; and iii) responsibilities of the Credit Risk Control Unit (CRCU).
  • Internal validation. The internal validation function should perform a consistent and meaningful assessment of the performance of internal rating and risk estimation systems.
  • Internal audit. The internal audit or another comparable independent unit shall review the institution’s rating systems and its operations at least annually.
  • Model use. The ECB acknowledges that the degree of use of internal ratings and default and loss estimates in the institution’s risk management is more expensive for PD/internal ratings than for LGD/loss estimates and conversion factors.
  • Management of changes to the IRB approach. Changes to a rating system’s range of application or to a rating system itself are subject to approval by the CAs if assessed as material, or to ex ante or ex post notification if non-material.
  • Third-party involvement. These principles refer to the involvement of third party in IRB models, focusing on internal functions and tasks.

Download the technical note by clicking here