The Swedish Financial Supervisory Authority has published a memorandum setting out its expectations for banks’ use of internal models to calculate capital requirements for credit risk, reflecting the increased flexibility introduced through the Capital Requirements Regulation III (CRR3) changes that took effect on 1 January 2025. The memo draws on experience from model assessments and notes that many model applications received by the authority have not met the required quality standards, partly because certain exposure types are particularly difficult to model. While the authority welcomes the greater scope under CRR3 for banks to tailor their mix of methods to portfolio characteristics, it underlines that any move back to less advanced approaches must not be driven by supervisory arbitrage, and that high standards of model quality and robust risk management apply regardless of the method chosen.
Finansinspektionen 2025-06-13
Swedish Financial Supervisory Authority clarifies expectations for banks using CRR3 flexibility in credit risk capital calculations
The Swedish Financial Supervisory Authority issued a memorandum outlining expectations for banks' use of internal models for credit risk capital requirements, following the Capital Requirements Regulation III changes effective 1 January 2025. The memo highlights concerns over model application quality and stresses that any shift to less advanced methods should not be due to supervisory arbitrage, maintaining high standards of model quality and risk management.