The ECB-SSM's New Draft Supervisory "Guide" on Models Used to Assess Counterparty Credit Risk and Set Regulatory Capital Levels
How does this further ECB-SSM "Guide" impact model governance for direct ECB-supervised and other Banking Union Supervised Institutions (BUSIs)?
On 15 December 2017, the European Central Bank (ECB), acting in its supervisory role within the Banking Union's Single Supervisory Mechanism (SSM), launched a consultation on a draft "Guide on assessment methodology - assessment methodology for the IMM and A-CVA". This Guide is shortened by the ECB and herein as EGAM. EGAM is the latest and perhaps most revealing attempt by the ECB-SSM to advance a very technical part of the EU Single Rulebook for the BUSIs it supervises. It also builds on existing efforts to streamline that Single Rulebook in how it is applied in the Eurozone and its Banking Union.
Although EGAM pertains to some highly detailed rules in terms of model governance the independence of model validation, the permitted use of third-parties in relation to models and very detailed descriptions of how compliance will be supervised, the real story here concerns the governance that the ECB-SSM expects BUSIs to employ in connection with the use of models. This Client Alert provides an overview of EGAM's content, how its supervisory objectives fit within the EU's Single Rulebook, as applied within the Banking Union and some preparatory steps that BUSIs might want to consider as "no regret actions".