In this note, we discuss the proposal for a reform of internal rating models outlined by the Basel Committee. We first present internal rating models (which currently generate roughly 50% of supervisory capital in the European Union) and the reasons why they have been increasingly criticised. We then review the key proposals circulated by the Basel Committee: the removal of internal models for “low-default portfolios” (where defaults are too infrequent to allow adequate calibration); additional constraints on internal models’ estimates (“input floors”); an “output floor” tying the capital requirements generated by internal ratings to those that would emerge from the standardised approach. We than explain why, in our opinion, floors represent a technically flawed answer, and suggest a number of supervisory actions that may be pursued, instead, to restore internal models’ credibility, without causing an excessive burden for banking authorities. Such actions, which have already been explored by the EU in the last few years, should be embraced wholeheartedly by supervisors, to ensure that increased transparency on implementation and validation practices may restore market confidence in internal models.

Banks' internal rating models - time for a change?

RESTI, ANDREA CESARE
2016-01-01

Abstract

In this note, we discuss the proposal for a reform of internal rating models outlined by the Basel Committee. We first present internal rating models (which currently generate roughly 50% of supervisory capital in the European Union) and the reasons why they have been increasingly criticised. We then review the key proposals circulated by the Basel Committee: the removal of internal models for “low-default portfolios” (where defaults are too infrequent to allow adequate calibration); additional constraints on internal models’ estimates (“input floors”); an “output floor” tying the capital requirements generated by internal ratings to those that would emerge from the standardised approach. We than explain why, in our opinion, floors represent a technically flawed answer, and suggest a number of supervisory actions that may be pursued, instead, to restore internal models’ credibility, without causing an excessive burden for banking authorities. Such actions, which have already been explored by the EU in the last few years, should be embraced wholeheartedly by supervisors, to ensure that increased transparency on implementation and validation practices may restore market confidence in internal models.
Resti, ANDREA CESARE
File in questo prodotto:
Non ci sono file associati a questo prodotto.

I documenti in IRIS sono protetti da copyright e tutti i diritti sono riservati, salvo diversa indicazione.

Utilizza questo identificativo per citare o creare un link a questo documento: https://hdl.handle.net/11565/3994401
 Attenzione

Attenzione! I dati visualizzati non sono stati sottoposti a validazione da parte dell'ateneo

Citazioni
  • ???jsp.display-item.citation.pmc??? ND
  • Scopus ND
  • ???jsp.display-item.citation.isi??? ND
social impact