to do this on eu level. in that context, we need to strike the second balance : in order to guarantee the same high standards in the entire ssm, we have to achieve eu - and ssm - wide harmonisation on the one hand ; on the other hand, however, we should not go too far, meaning that we cannot achieve an exhaustive list for each and any model decision. while we need harmonisation of definitions and supervisory procedures – in order to close relevant gaps – supervisory agencies should not be condemned to taking a box - ticking approach. since every model is different, the boxticking approach would only undermine a critical review of a bank ’ s model. i believe it to be important that we keep these balances in mind when we come to design new rules or redesign old ones. let me now outline the priorities for future work on improving internal models in the eu from the bundesbank ’ s point of view. with regard to credit risk and the boundaries for the irb approaches, it ’ s important that we implement the basel iii compromise in a rigorous way. this means that input and output floors will prevent the internal calculations of regulatory capital requirements from going too low. but at the same time, it maintains the internal modelling approach and, with that, substantial freedoms for banks to calculate regulatory capital. another important point concerns credit risks, but also other risk type models. the targeted review of internal models, the trim project, by the ssm should be conducted in a responsible 4 / 5 bis central bankers'speeches and considered manner – it needs to strike the two balances that i highlighted. this means specifically : the biotope of risk modelling approaches must be kept diverse. a right understanding of harmonisation means not only treating equal things equally, but also treating unequal things unequally. trim must ensure, that the playing field for banks is levelled, but not create a monoculture of models driven by supervisory rules. furthermore, it means that we have to balance conservativism and precision. supervisors will always be tempted to make risk estimates more conservative – which is, of course, prudent. being too conservative, however will make risk models less attractive for banks to use it not only as a regulatory instrument but also as an effective internal risk management tool. finally, changes that we will introduce through the trim project must be implemented in a reasonable manner. banks need a transitional period to adopt the new standards. let me close these policy

guidelines with a clear statement : throughout all regulatory and supervisory projects to finalise the reform agenda for internal modelling, the bundesbank will advocate the retention of risk sensitivity. 6. conclusion ladies and gentlemen you have a full agenda of challenges in risk modelling ahead of you. moreover, during the coming years you hopefully will help to make financial risk models better. my key take - aways for these one and a half days and your future work are : first, internal models have rightfully lost their sacrosanct status, as they revealed big weaknesses during the last financial crisis. models will never be perfect. we always have to be aware of the underlying assumptions and their shortcomings. second : after regulatory reform, internal models rightly continue to play a big role, but now a complementary one. limits have been set. but we shouldn ’ t overreact. it is also important to maintain incentives for banks with regard to a risk - sensitive framework. this is why, on the basel committee, german authorities have resolutely argued in favour of sufficient incentives for internal models. third : on the basis of the limits set by the basel iii reforms, we have to look forward now, and ncas, eba and ssm have to set about improving internal models further so that they can contribute to efficient and stable financial markets – at the service of the real economy. again, many thanks for inviting me – i wish all of you a fruitful workshop. thank you for your kind attention. 1 knight, f. h. ( 1921 ) risk, uncertainty, and profit. boston, ma : hart, schaffner & marx ; houghton mifflin company. 5 / 5 bis central bankers'speeches