The European Central Bank (ECB) has published a revised version of its guide to internal models, reflecting updates under the Capital Requirements Regulation (CRR3) and the revised Basel framework. The update enhances transparency around the ECB's interpretation of key regulatory requirements. The main updates include: (i) a newly introduced section outlining supervisory expectations for the use of machine learning in internal models, which aims to ensure that models using these techniques are adequately explainable and that their performance justifies their complexity; (ii) updates to the 'credit risk' chapter refining expectations on roll-out and permanent partial use, internal validation and audit (in line with the EBA's Internal Ratings-Based handbook), default definitions and risk parameter estimation and clarifying senior management responsibilities; (iii) splitting the topic of 'market risk' into two chapters to reflect supervisory expectations under CRR2 and CRR3 frameworks, acknowledging delays in implementing the new Basel standards—initially to 2026, with a further proposed delay to 2027 pending EU scrutiny; and (iv) expanded guidance under the chapter on 'counterparty credit risk' on modelling exposures, trade risks, and maturity adjustments in accordance with CRR3.
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