European Union: ECB-SSM Issues Stark Warning In Its "Spring Update" On TRIM – What Now?

Last Updated: 30 May 2019
Article by Michael Huertas

The European Central Bank (ECB), acting in its role as the head of the Banking Union's Single Supervisory Mechanism (SSM) published on April 3, its interim update on the Targeted Review of Internal Models (TRIM) (the April 2019 Note).1 The document is called a "note" rather than a "letter" in comparison with the June 11, 2018 Status update on TRIM (the June 2018 update).2 Both are published as part of the ECB's "Letters to banks" which are namely communications to the banking industry and Banking Union Supervised Institutions (BUSIs) to clarify processes and practices related to its supervisory tasks.

However, as discussed in this Client Alert, the letter is the first of its kind and given the fact that the ECB does not have absolute power to make use of publication findings in such a manner, the April 2019 Note could thus be seen as trying to establish precedent. Could this publication be compared to the FCA's Dear CEO letters? There are grounds to suggest so, as these types of communications usually highlight the supervisor's concern about particular issues in an industry area. What is the ECB aiming to achieve with it? That remains to be seen but several potential answers emerge as the ECB-SSM sets a starker supervisory tone but on the one hand consults on amendments to how it levies fees3. TRIM has been and remains a multi-annual supervisory priority even if, now in 20194, it is starting to come to an end. The April 2019 Note also states that: "Going forward, the note may be updated and expanded as necessary to reflect additional analyses conducted in the meantime." This, like the ECB's Guide on internal models points to the April 2019 Note being viewed by the ECB as a "living document" that forms the basis of on-going supervisory dialogue between SSM and BUSIs.

A new tone

The April 2019 Note's letter-like introduction reports on the updated outcomes of TRIM and aims to facilitate involvement of the different institutions in the supervisory process and foster a better understanding of the context of the procedure. This is similar to the concluding statements of the June 2018 Update which also stated that involvement of institutions' top management in TRIM is essential to the success of the project and the role played by internal models. The April 2019 Note explicitly states that individual institutions will then be informed about possible updates of the document to reflect the additional analyses conducted in the meantime. This begs the question why the interim findings then need to be publicly distributed? One answer could be that the April 2019 Note should be seen as somewhat of a spring "report card" aimed at indicating how well or badly institutions are doing when it comes to the supervisory objectives the ECB-SSM set in TRIM.

In terms of content, the April 2019 Note is structured in three parts with: a high-level summary of the TRIM objectives and main achievements; a detailed overview on the main insights that have emerged from the horizontal analyses; a summary of the next steps. Additionally, it also aims to provide an overview of the main findings related to data quality review; to report the most common or critical shortcomings identified during TRIM investigations on internal models for market risk and to complement the analysis on credit risk internal models which also featured in the 2018 June Update.

Status update on TRIM

The TRIM project's main aims included goals to reduce unwarranted variability when institutions use internal models to calculate their risk-weighted assets (RWA) and to ensure a consistent use of high supervisory standards in the Banking Union. It covered internal models for credit, market and counterparty credit risk and since its inception in 2015 and start of the execution phase in 2017, TRIM has involved about 200 on-site investigations on internal models at 65 significant credit institutions across the SSM. During the execution phase a review of the internal credit risk models for retail and small and medium-sized enterprise portfolios and market risk and counterparty credit risk models was conducted. A review of the models used to assess the credit risk for low-default portfolios is still ongoing. It is also feeding into ECB-SSM supervisory reforms that are part of the 2019 supervisory priorities that in turn are also impacting reforms on ICAAP and ILAAP – as discussed in standalone Client Alerts.

The April 2019 Note sees TRIM as contributing to success in four key areas:

  • providing a common understanding across the SSM of regulatory requirements related to internal models. This then allowed the ECB to publish a guide to internal models;5 Note that his guide is a refinement of the TRIM guide that was made available for early industry feedback in 2017;
  • designing and rolling out a consistent approach to assess internal models in the context of TRIM as a whole;
  • improving a systematic overview of the features and weaknesses of internal models of significant institutions thereby allowing the ECB to identify and address shortcomings; and
  • introducing tangible changes in the internal models across the SSM as a result of TRIM-related supervisory decisions.

The remainder of the April 2019 Note considers the TRIM horizontal analyses and provides an overview of the features of internal models as the most important part of TRIM's tasks.

Outcome of TRIM investigations and horizontal reviews

The April 2019 Note's section on investigations and horizontal review follows almost word for word the 2018 June Update. It states that cases of outright non-compliance with the applicable regulation were addressed through supervisory decisions imposing obligations on the affected institutions to remediate the issues. Further, additional potential misalignments with further aspects of the regulatory framework were communicated to the institutions via follow-up letters requiring action on their behalf.

As a whole the numbers are the same as in the 2018 findings with 29% of the 21 institutions that received a dedicated supervisory decision on general topics being found to have shortcomings in the absence of a model change policy or absence of notification of material model changes to the competent authority. This is followed by 24% of the institutions lacking evidence of annual back-testing for some rating systems. 19% of the institutions use the standardized approach without formal authorization of a permanent partial use and the same number also have no strict segregation of staff performing validation activities and staff involved in tasks of the credit risk control function. Finally, 14% were allocated as having a deficiency in terms of their "current resources allocated to the internal validation function thereby preventing a robust validation process". All of this is not very encouraging both for TRIM relevant firms but equally not for the ECB-SSM.

The April 2019 Note also includes a non-exhaustive list of examples of issues communicated in the follow-up letters and the number of institutions, 55 of them, in terms of what they received. These are as follows and will also likely be relevant for other Banking Union Supervised Institutions that have not (yet) received TRIM follow-up letters:

Description of issues Share of institutions that received follow-up letters

1. Implementation of a model risk management framework

" Despite some measurement of model risk and partial controls in place, practices not formalized/documented


" Absence of model risk management (steering and mitigation)


" Model risk not identified as a material risk by the institution (lack of awareness)


2. Application of the IRB approach and monitoring of permanent partial use (PPU) provisions

" Absence of monitoring of the PPU conditions


" Absence of clear criteria for the decision on the application of the IRB approach (selection done on a case-by-case basis)


3. Decision-making responsibilities and internal reporting

" Level of detail in the reporting is not appropriate


" Management body (or a designated committee thereof) does not approve all risk management policies


4. Organization of the internal validation function

" Deficiencies in the validation policy and procedures


5. Scope and frequency of the audit review of the rating systems

" Lack of resources to allow a relevant assessment of the IRB requirements


" Some of the rating systems not reviewed by internal audit


" Certain aspects of the rating systems not reviewed regularly


6. Non-rated exposures and outdated ratings

" Non-rated exposures or exposures with outdated ratings not monitored by the institution


" No specific prudential treatment for non-rated exposures, or exposures with outdated ratings, or such exposures treated under the standardized approach


7. Change policy and re-rating process

" Process for the re-rating and implementation of the new model not formalized


" Model change policy missing key elements such as responsibilities, impact assessment procedures or process for the classification of the changes


The rest of the section follows closely the 2018 June Update. TRIM investigations in 2018 focused on credit risk models related to exposure classes Retail and Corporate SME and their compliance with the CRR. In the event of non-compliance supervisory decision were issued with institutions being asked to address the findings. The findings focused on the probability of default (PD), loss given default (LGD) and credit conversion factor (CCF). The findings with regards to the PD and LGD parameters are taken directly from the 2018 letter and state that the shortcomings in the PD area are related to a lack of consideration of relevant risk drivers or lack of an appropriate definition of the grades, while those in relation to the LGD parameter involve the use of an inappropriate discount rate and the treatment of multiple defaults; and specific aspects of the calculation (such as lack of an appropriate treatment of restructuring case or insufficient consideration of indirect costs) identified during the on-site investigations.

The new analysis included in this part focuses on the review of data management practices applied by the institutions to the specific credit risk models under review, as well as the review and assessment of the quality of PD and LGD historical data used. The analysis concluded that data quality-related findings are present in all institutions be it in relation to data management or data quality processes such as: the data quality framework's governing principles and scope of application; the policies on data quality management and processes; the allocation of roles and responsibilities in relation to the management of data quality; the current metric approach for monitoring data quality; the processes for data quality incident remediation. Data management and data quality processes were the areas where the findings with higher severity were found. IT infrastructure was also found lacking with a lack of documentation on the infrastructure and processes as well as issues related to the technical implementation of the Definition of Default and technical tests on the data maintenance.

In terms of the market risk investigation which was completed in June 2018, the majority of the findings concern the value-at-risk (VaR) and stressed VaR (sVaR) methodology regulatory back-testing, the scope of the internal model approach (IMA) and the incremental risk charge (IRC) methodology. The shortcoming in relation to VaR and sVaR are the most severe and relate to the general model issues and documentation weaknesses; data quality issues; inadequate or not fully validated coverage of risk factors in the Var or sVaR models and issues regarding the pricing methods in the model. The ECB guide is seen here as providing guidance and a clear definition of proxies in a way ensuring common understanding and alignment of practices.

The TRIM review also showed that the elements recognized for actual (losses predicted by the VaR model with those actually realized) and hypothetical (hypothetical losses predicted by assuming that positions remain unchanged) P&Ls were not always in line with regulatory requirements, not aligned across institutions. These relate to regulatory back-testing which is a key element to monitor the quality of VaR models. On-site investigations also reveled that well-justified PD values in IRC models are not used by all institutions and that PDs assigned to the same or similar issuers can vary materially across institutions. The ECB guide thus recommends that PDS used in IRC models should be risk-sensitive and strictly greater than zero for all obligors.

Outlook and next steps

The TRIM project is due to end in early 2020 upon finalization of the analyses and the relevant project documentation. A consolidated version of the ECB Guide on internal models is expected to be published shortly, while the on-site investigations will continue throughout the year with the investigations on models for low-default portfolios. That activity is expected to factor back into the ECB's Guide on internal models which is expected to evolve as a "live document". Delivery of TRIM also coincides with the SSM taking stock of 5 years6 of how it has implemented its model of supervision and the road ahead under new leadership.

What is telling is that the April 2019 Note finishes by saying that "intense follow-up work by the institutions is expected in the short term to remediate the shortcomings identified in the relevant decisions." As such BUSIs are encouraged to proactively plan and engage with the ECB-SSM's Joint Supervisory Teams given what the ECB-SSM phrases as an "intense period ahead for internal model resources."

Our Eurozone Hub lawyers are assisting a number of BUSIs in dealing with TRIM-related supervisory dialogue and how this impacts workstreams beyond internal model remediation. If you would like to receive further analysis on any other issues raised herein with regard to how to prepare in relation to documentation and non-documentation workstreams, please contact one of our Eurozone Hub key contacts to the right.


1 Available here.

2 Available here.

3 See our Eurozone Hub coverage available here while at the same time publishing an announcement of EUR 576 million in fees as well as instructions for completing how total assets and total risk exposure for purposes of fee calculation.

4 See our "Navigating 2019" regulatory outlook that puts TRIM into context and which is available here.

5 Available here. See a dedicated publication from our Eurozone Hub on the Guide.

6 See the ECB's Annual Report on supervisory activities 2018 available here and dedicated coverage from our Eurozone Hub.

Dentons is the world's first polycentric global law firm. A top 20 firm on the Acritas 2015 Global Elite Brand Index, the Firm is committed to challenging the status quo in delivering consistent and uncompromising quality and value in new and inventive ways. Driven to provide clients a competitive edge, and connected to the communities where its clients want to do business, Dentons knows that understanding local cultures is crucial to successfully completing a deal, resolving a dispute or solving a business challenge. Now the world's largest law firm, Dentons' global team builds agile, tailored solutions to meet the local, national and global needs of private and public clients of any size in more than 125 locations serving 50-plus countries.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

To print this article, all you need is to be registered on

Click to Login as an existing user or Register so you can print this article.

Some comments from our readers…
“The articles are extremely timely and highly applicable”
“I often find critical information not available elsewhere”
“As in-house counsel, Mondaq’s service is of great value”

Related Topics
Related Articles
Up-coming Events Search
Font Size:
Mondaq on Twitter
Mondaq Free Registration
Gain access to Mondaq global archive of over 375,000 articles covering 200 countries with a personalised News Alert and automatic login on this device.
Mondaq News Alert (some suggested topics and region)
Select Topics
Registration (please scroll down to set your data preferences)

Mondaq Ltd requires you to register and provide information that personally identifies you, including your content preferences, for three primary purposes (full details of Mondaq’s use of your personal data can be found in our Privacy and Cookies Notice):

  • To allow you to personalize the Mondaq websites you are visiting to show content ("Content") relevant to your interests.
  • To enable features such as password reminder, news alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our content providers ("Contributors") who contribute Content for free for your use.

Mondaq hopes that our registered users will support us in maintaining our free to view business model by consenting to our use of your personal data as described below.

Mondaq has a "free to view" business model. Our services are paid for by Contributors in exchange for Mondaq providing them with access to information about who accesses their content. Once personal data is transferred to our Contributors they become a data controller of this personal data. They use it to measure the response that their articles are receiving, as a form of market research. They may also use it to provide Mondaq users with information about their products and services.

Details of each Contributor to which your personal data will be transferred is clearly stated within the Content that you access. For full details of how this Contributor will use your personal data, you should review the Contributor’s own Privacy Notice.

Please indicate your preference below:

Yes, I am happy to support Mondaq in maintaining its free to view business model by agreeing to allow Mondaq to share my personal data with Contributors whose Content I access
No, I do not want Mondaq to share my personal data with Contributors

Also please let us know whether you are happy to receive communications promoting products and services offered by Mondaq:

Yes, I am happy to received promotional communications from Mondaq
No, please do not send me promotional communications from Mondaq
Terms & Conditions (the Website) is owned and managed by Mondaq Ltd (Mondaq). Mondaq grants you a non-exclusive, revocable licence to access the Website and associated services, such as the Mondaq News Alerts (Services), subject to and in consideration of your compliance with the following terms and conditions of use (Terms). Your use of the Website and/or Services constitutes your agreement to the Terms. Mondaq may terminate your use of the Website and Services if you are in breach of these Terms or if Mondaq decides to terminate the licence granted hereunder for any reason whatsoever.

Use of

To Use you must be: eighteen (18) years old or over; legally capable of entering into binding contracts; and not in any way prohibited by the applicable law to enter into these Terms in the jurisdiction which you are currently located.

You may use the Website as an unregistered user, however, you are required to register as a user if you wish to read the full text of the Content or to receive the Services.

You may not modify, publish, transmit, transfer or sell, reproduce, create derivative works from, distribute, perform, link, display, or in any way exploit any of the Content, in whole or in part, except as expressly permitted in these Terms or with the prior written consent of Mondaq. You may not use electronic or other means to extract details or information from the Content. Nor shall you extract information about users or Contributors in order to offer them any services or products.

In your use of the Website and/or Services you shall: comply with all applicable laws, regulations, directives and legislations which apply to your Use of the Website and/or Services in whatever country you are physically located including without limitation any and all consumer law, export control laws and regulations; provide to us true, correct and accurate information and promptly inform us in the event that any information that you have provided to us changes or becomes inaccurate; notify Mondaq immediately of any circumstances where you have reason to believe that any Intellectual Property Rights or any other rights of any third party may have been infringed; co-operate with reasonable security or other checks or requests for information made by Mondaq from time to time; and at all times be fully liable for the breach of any of these Terms by a third party using your login details to access the Website and/or Services

however, you shall not: do anything likely to impair, interfere with or damage or cause harm or distress to any persons, or the network; do anything that will infringe any Intellectual Property Rights or other rights of Mondaq or any third party; or use the Website, Services and/or Content otherwise than in accordance with these Terms; use any trade marks or service marks of Mondaq or the Contributors, or do anything which may be seen to take unfair advantage of the reputation and goodwill of Mondaq or the Contributors, or the Website, Services and/or Content.

Mondaq reserves the right, in its sole discretion, to take any action that it deems necessary and appropriate in the event it considers that there is a breach or threatened breach of the Terms.

Mondaq’s Rights and Obligations

Unless otherwise expressly set out to the contrary, nothing in these Terms shall serve to transfer from Mondaq to you, any Intellectual Property Rights owned by and/or licensed to Mondaq and all rights, title and interest in and to such Intellectual Property Rights will remain exclusively with Mondaq and/or its licensors.

Mondaq shall use its reasonable endeavours to make the Website and Services available to you at all times, but we cannot guarantee an uninterrupted and fault free service.

Mondaq reserves the right to make changes to the services and/or the Website or part thereof, from time to time, and we may add, remove, modify and/or vary any elements of features and functionalities of the Website or the services.

Mondaq also reserves the right from time to time to monitor your Use of the Website and/or services.


The Content is general information only. It is not intended to constitute legal advice or seek to be the complete and comprehensive statement of the law, nor is it intended to address your specific requirements or provide advice on which reliance should be placed. Mondaq and/or its Contributors and other suppliers make no representations about the suitability of the information contained in the Content for any purpose. All Content provided "as is" without warranty of any kind. Mondaq and/or its Contributors and other suppliers hereby exclude and disclaim all representations, warranties or guarantees with regard to the Content, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. To the maximum extent permitted by law, Mondaq expressly excludes all representations, warranties, obligations, and liabilities arising out of or in connection with all Content. In no event shall Mondaq and/or its respective suppliers be liable for any special, indirect or consequential damages or any damages whatsoever resulting from loss of use, data or profits, whether in an action of contract, negligence or other tortious action, arising out of or in connection with the use of the Content or performance of Mondaq’s Services.


Mondaq may alter or amend these Terms by amending them on the Website. By continuing to Use the Services and/or the Website after such amendment, you will be deemed to have accepted any amendment to these Terms.

These Terms shall be governed by and construed in accordance with the laws of England and Wales and you irrevocably submit to the exclusive jurisdiction of the courts of England and Wales to settle any dispute which may arise out of or in connection with these Terms. If you live outside the United Kingdom, English law shall apply only to the extent that English law shall not deprive you of any legal protection accorded in accordance with the law of the place where you are habitually resident ("Local Law"). In the event English law deprives you of any legal protection which is accorded to you under Local Law, then these terms shall be governed by Local Law and any dispute or claim arising out of or in connection with these Terms shall be subject to the non-exclusive jurisdiction of the courts where you are habitually resident.

You may print and keep a copy of these Terms, which form the entire agreement between you and Mondaq and supersede any other communications or advertising in respect of the Service and/or the Website.

No delay in exercising or non-exercise by you and/or Mondaq of any of its rights under or in connection with these Terms shall operate as a waiver or release of each of your or Mondaq’s right. Rather, any such waiver or release must be specifically granted in writing signed by the party granting it.

If any part of these Terms is held unenforceable, that part shall be enforced to the maximum extent permissible so as to give effect to the intent of the parties, and the Terms shall continue in full force and effect.

Mondaq shall not incur any liability to you on account of any loss or damage resulting from any delay or failure to perform all or any part of these Terms if such delay or failure is caused, in whole or in part, by events, occurrences, or causes beyond the control of Mondaq. Such events, occurrences or causes will include, without limitation, acts of God, strikes, lockouts, server and network failure, riots, acts of war, earthquakes, fire and explosions.

By clicking Register you state you have read and agree to our Terms and Conditions