The European Central Bank’s new regime for supervising changes to banks’ internal credit risk models will come into force on 1 October 2026, marking a shift towards faster approvals and more targeted supervisory scrutiny.
Under the new approach, the ECB will move from an ex ante to an ex post assessment for many material model changes, allowing banks to implement some revisions shortly after submitting a complete application package rather than waiting for a full supervisory decision.
The reform is designed to make the approval process quicker and more predictable for banks, while allowing supervisors to focus on model changes and portfolios where risks are judged to be higher.
Faster rollout for model changes
The reform targets one of the more technical but important areas of banking supervision. Under EU rules, banks can, with supervisory permission, use internal models instead of standard risk weights to calculate capital requirements. They must also seek approval for material changes to those models.
Until now, that process could leave banks maintaining old and new models in parallel while awaiting supervisory review, adding cost and operational complexity. By allowing banks to put some revised models into use earlier, the ECB is seeking to reduce delays and ease that burden.
Early implementation will still depend on safeguards. A bank’s internal control function will have to confirm credibly that the revised model complies with regulatory requirements and that the institution is ready to implement the change.
Capital benefit capped
The ECB has made clear that faster approval will not automatically translate into immediate capital relief. Where a model change leads to lower risk weights, banks will still be able to use the new model quickly, but the resulting capital benefit will be constrained by a floor.
That floor will apply to all approved model changes and will only be lifted once the ECB has carried out a targeted on-site investigation into the features of the new model.
The structure is intended to let banks move faster operationally while preventing them from securing the full capital advantage of a revised model before supervisors have tested it more thoroughly.
Scrutiny shifts to higher-risk cases
A central part of the reform is that material model changes will no longer automatically trigger an on-site investigation. Instead, the ECB will carry out such reviews primarily where risks warrant closer scrutiny.
That marks a shift towards a more targeted supervisory model. Rather than reviewing every significant change in the same way, the ECB plans to focus on models showing outlier behaviour in horizontal analyses or models that may reveal weaknesses in a changing macroeconomic environment.
The change also frees up supervisory resources. In 2025, the ECB conducted 74 on-site investigations of internal models, with more than 90% triggered by banks seeking initial model approvals or material model changes, including changes made in response to earlier supervisory findings.
Balance between speed and control
The reform is likely to be welcomed by banks, which have long argued that model approval processes can be slow and resource-intensive. But the ECB is also seeking to avoid any impression that it is weakening standards.
By allowing earlier implementation while capping capital benefits and retaining the option of a full approval process for sensitive cases, the central bank is trying to strike a balance between faster decision-making and continued prudential control.
For the banking sector, the practical effect begins on 1 October 2026, when many credit risk model changes should become easier to implement, although supervisory tolerance will remain limited where those changes materially reduce capital requirements or raise broader risk concerns.
