The European Central Bank (ECB), in cooperation with the National Competent Authorities (NCAs) launched in 2016 the targeted review of Internal Models (TRIM). The TRIM aimed to assess whether the Pillar I internal models used by significant institutions (SIs) within the Single Supervisory Mechanism (SSM) are appropriate in the light of the applicable regulatory requirements and whether their results are reliable and comparable.
TRIM Project Report
In this context, the ECB has published the TRIM results which compiles the outcome of the investigations carried out for credit risk models, market risk models and counterparty credit risk models.
The ECB has published the Results of the TRIM. These results confirmed that banks can continue to use internal models to calculate risk-weighted assets. However, limitations were needed to ensure a level of own funds as well as certain weaknesses to be addressed. In the future, banks will need to continue to invest in high-quality models. For that purpose, it is particularly important that banks further strengthen their internal validation function.
This Technical Note focuses on the main observations and findings of the TRIM:
- Credit risk models related to retail and small and medium enterprise portfolios. 85 investigations have been carried out. Institutions generally have the capabilities to build adequate internal ratings-based models.
- Credit risk models related to low-default portfolios. 76 investigations have been carried out. Large number of findings were raised in relation to the rating assignment process and risk quantification. These mainly concerned the calibration methodology and the calculation of long-run average default rates.
- Market risk. 31 Investigations have been carried out. The greatest number of findings were related to the Value-at-Risk, and Stressed Value-at-Risk methodology, regulatory back-testing and the scope of the internal models approach.
- Counterparty credit risk. 8 investigations have been carried out. Validation and governance were the topics with the highest number of findings. There were also findings on specific modelling topics such as trade coverage, the margin period of risk, collateral, initial margin, and risk factors and calibration.
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