European Central Bank Banking Supervision has published a revised approach for assessing banks’ material changes and extensions to internal models for credit risk, shifting from an ex ante approval model to an ex post assessment designed to make approvals faster and more predictable. From 1 October 2026, banks will be able to implement material model changes shortly after submitting a complete application package, subject to safeguards. Implementation will be conditional on the bank’s internal control function credibly confirming that the revised model meets regulatory requirements and is ready to be applied. Where a change results in lower risk weights, the ECB will still allow swift use of the new model but will constrain the regulatory capital benefit via a floor set at 98% of current risk weights for material model changes and at current risk weights for material model extensions, with the floor liftable only after a targeted on-site investigation. The ECB will also move to a more risk-based use of on-site investigations, no longer treating every material change as an automatic trigger, while retaining the option to apply the standard approval process for sensitive cases. Separately, the European Banking Authority has released a revised Regulatory Technical Standard on assessing the materiality of internal model changes for credit risk, recalibrating criteria with greater reliance on quantitative thresholds and more targeted qualitative triggers, which reduces the number of changes classified as material and therefore subject to ECB approval. The ECB reiterated its supervisory expectation that banks focus internal models on strategic loan portfolios and consider the standardised approach for small or operationally costly modelled portfolios.
European Central Bank - Banking Supervision 2026-03-30
European Central Bank streamlines approval of credit risk internal model changes with ex post review and capital floors
The European Central Bank Banking Supervision has revised its approach to assessing banks’ material changes and extensions to internal models for credit risk, moving from ex ante approval to ex post assessment to accelerate and increase predictability of approvals, subject to internal control confirmation and capital floors where risk weights fall. The European Banking Authority has updated its Regulatory Technical Standard on materiality of internal model changes, increasing reliance on quantitative thresholds and reducing the number of changes requiring European Central Bank approval. The European Central Bank reiterated that banks should prioritise internal models for strategic loan portfolios and consider the standardised approach for smaller or operationally costly portfolios.