European Central Bank updates counterparty credit risk internal model assessment guide and removes A-CVA content

The European Central Bank has published version 2.0 of its Guide on assessment methodology for the internal model method for calculating exposure to counterparty credit risk. The update removes all sections, chapters and references relating to the advanced method for own funds requirements for credit valuation adjustment risk, leaving the guide focused on the internal model method for counterparty credit risk. The change reflects the replacement of A-CVA by SA-CVA with effect from Jan. 1, 2025, and the Capital Requirements Regulation mandate for the European Banking Authority to develop regulatory technical standards for the SA-CVA assessment methodology. The remaining guide sets out how the ECB assesses institutions' compliance with the Capital Requirements Regulation when granting permission to use the internal model method, reviewing model changes or extensions, and monitoring approved models. It covers the supervisory approach across model roll-out, governance and validation, use test, documentation and design, exposure quantification, stress testing, wrong-way risk, and data and IT controls. The ECB states that the guide is intended to provide transparency on its assessment methods, should not be read as going beyond applicable EU and national law, and can also serve as optional guidance for significant institutions' self-assessments of their internal model method frameworks.