IRB update: Simplification of changes to internal models

IRB banks will welcome the ECB’s plan to streamline the approval of internal model changes. But faster approval is conditional on robust and credible internal control confirmation. Banks can act now to prepare for the new approach – and reap the potential benefits of faster, easier model changes.

On 30^th March, the ECB announced its intention to simplify the approval of material changes to the internal models (IMs) used by IRB¹ banks to calculate risk-weighted exposure amounts (RWEAs). This is one of several measures aimed at streamlining IM supervision, and part of the ECB’s ’next level supervision’ initiative intended to improve efficiency and effectiveness.

On the same day, the EBA published proposed changes to the RTS² on material model changes. This will cut the number of changes classified as material, by placing stronger reliance on quantitative thresholds and limiting qualitative criteria. The revised RTS is explicitly intended to complement the ECB’s supervisory simplification.

Together these publications are expected to lead quicker and smoother IRB model change approvals for EU banks.

From 1^st October 2026 onwards, the ECB will allow banks to follow a faster approach to the approval of material model changes. Instead of waiting for ECB assessment and an on-site internal model investigation (IMI), banks will have the opportunity to change their IRB credit risk models shortly after submitting a completed application package: material model changes will no longer automatically trigger an IMI.

However, this new approach is conditional on an internal control function such as Internal Audit or Independent Validation Unit confirming the changes as compliant with the applicable regulation, and ready for implementation. Two other notable caveats are that:

• The ECB will apply a temporary floor to any RWEA reduction arising from model changes until a dedicated IMI has been completed.
• For “sensitive cases”, the ECB reserves the right to follow the standard approval process, including a dedicated IMI.

Within this approach, the ECB’s expectation is that most IMIs will focus on higher risk model changes. However, without a clear definition of “sensitive cases”, JSTs will clearly retain some discretion over which changes require IMIs, especially in cases where past performance of internal control functions has not been satisfactory.

The combined changes to supervisory processes and EBA materiality criteria are expected to reduce the number of model changes classified as material: this may reduce the volume of applications and may lead to faster approvals, but such changes are not expected to reduce the overall supervisory scrutiny. In fact, JSTs may increase their scrutiny of banks with previous IM findings or with models showing outlier behaviour in horizontal analysis, reflecting also a broader reallocation of supervisory resources towards higher‑risk banks, portfolios, or models. Based on our experience, we would anticipate that:

• Faster model changes will depend, among other factors, on the ability of internal control functions to plan, execute and document robust, substantive reviews of compliance and readiness. This is expected to go beyond a formal statement and may involve a thorough review of compliance with applicable regulation and ECB expectations and guidelines.
• Internal control functions will need to demonstrate that they have the staff, skills, experience, competence and resources needed to credibly certify and confirm IM changes.
• Banks with persistent weaknesses in data, internal controls and governance frameworks may face increased supervisory scrutiny, potentially constraining their ability to benefit from streamlined model change procedures.
• The ECB is unlikely to make isolated “point in time” decisions for each model change submission. JSTs will respond more positively to upfront and proactive engagement and discussion, which can help clarify early on whether the streamlined approach may be applicable and support more effective planning of supervisory and bank-side efforts.
• Supervisory risks will persist, including the possibility that an IMI performed after a model change implementation could generate material findings and extensive remediation requirements, including the ex-post reversal of model changes.

The ECB’s streamlined approach to model changes will begin on the 1^st of October, while the EBA’s revised materiality criteria are still subject to EU endorsement and will only apply following their adoption and publication in the Official Journal. To prepare for the new regime, banks should:

• Address areas of weakness and legacy shortcomings: Prioritise the remediation of any previous IM-related findings, especially those related to governance, data or model performance.
• Strengthen internal control functions: Increase capacity and seniority, ensure the ability to issue credible, well‑evidenced confirmations supporting material model changes, and shift from a formal “sign‑off approach” to substantive analysis‑based assessments.
• Engage proactively: Initiate early, constructive dialogue with JSTs to align on model change classification, set expectations, and access streamlined IM approval where appropriate.
• Think strategically: Assess which model change submissions to make, and when, prioritising IM changes that combine clear upside benefits with strong internal readiness and avoid the risk of subsequent IMIs and rework.
• Leverage external subject matter expertise: Consider drawing on independent third-party support when preparing model change submission or strengthening internal control functions.

In this context, IRB banks should remember that though the ECB is aiming to streamline supervision, it has no intention to lessen scrutiny. Banks will need strong controls but also sufficient readiness if they are to enjoy the benefits of faster model change approvals. In short, don’t relax – get ready.