Ensuring comparability among Banks is coming out as a key theme from the BIS (Banks for international settlement) .Many new proposed guidelines on Pillar III Disclosures, Standardized approach for credit risk etc. are focusing on bringing about changes in
methodologies, calculations and reporting disclosures to achieve the comparability goal. The same rigor is also seen among regulators from various geographies. TRIM or Targeted review of Internal Model details out European Central Bank’s (ECB) one such effort
which aims to assess the Pillar 1 internal risk models used for Credit Risk, Market Risk and Counterparty credit risk are in compliance with regulatory requirement.
For ECB ,TRIM is being looked at as one of the top SSM (Single supervisory Mechanism) initiatives till 2019 .The efforts of TRIM are guided towards improving the robustness of the existing modelling frameworks and ensure reliability, transparency and accuracy
of the models which aid in the capital management process.
ECB is looking at the TRIM initiative to attain the below Key objectives
- Reduce inconsistencies and unwarranted variability in Internal Models used by Banks for RWA calculations .These variations occur due to inappropriate modelling and freedom given by regulators while modelling.
- Ensure compliance with Regulatory standards
- Confirm adequate Capital requirement
- All Significant Institutions with approved Pillar 1 internal models in scope
- 68 banks within 15 countries
Risk Type Covered
- Credit Risk - Retail and SME portfolios, At least 60% of the IRB EAD for Credit Risk portfolio
- Market Risk – All internal Models for Market Risk excludes CRM
- Counterparty Credit Risk - All internal Models for CCR excludes CVA
- Operational Risk Is currently out of scope due to forthcoming changes coming in the area
TRIM is one of the high priority projects of the SSM (Single Supervisory Mechanism) to harmonize supervision of the banks in the Eurozone. The
key expectations from the Banks is to
- Demonstrate compliance with the model framework
- Ensure adequate Model Validation Process
- Establish Policies and Procedures for Model Governance
TRIM execution will require high efforts both from the industry as well as the Regulators. Mentioned below the planned milestones for the TRIM initiative
- Preparatory Phase(2015-2016)
- Goal: is to select models and define assessment template
- ECB : Conduct surveys, onsite interviews ,Define Model selection ,criteria and finalize model
- Bank : Prepare for ECB requirements on TRIM
- Execution Phase (2017-2018)
- Goal: Assess Models and Horizontal Reviews
- ECB : Review Data quality, Conduct Model reviews, Parallel Horizontal reviews and Benchmark
- Bank : Provide relevant Model documents , Policies, demo model use and respond to any queries
- Remediation Phase (2019)
- Goal: Remediate and Monitor findings
- ECB : Communicate and monitor findings from the execution phase
- Bank: Findings remediation impacting model methodology, model governance, data and IT systems.
The results from the TRIM exercise will have multifold impact on the Bank and they may be expected to
- Establish a robust Model Management framework where in Banks may have to make changes to their current Model methodologies, Model Governance policies and Data Quality Practices, this will be true for the banks who are outliers in the peer analysis
- Develop and establish group wide policies and guidelines related to maintenance of internal models and also ensure adequate audit mechanisms are in place
Due to this exercise the Internal models will become more streamlined, which will in turn result the RWA’s to be more standardized .At no point the aim of this exercise is to increase the RWA’s for the Banks, however the industry is feeling that the Remedial
actions which will come out as an outcome of the TRIM exercise may eventually increase the RWA’s levels.