Basel Committee to limit use of IRB
The Basel Committee on Banking Supervision plans to limit the use of the internal ratings based approach for determining regulatory capital requirements in several cases where it believes risk cannot be modelled reliably.The BCBS has issued a consultation paper outlining proposals to reduce variations in the use of internal models.The BCBS said its aim was to reduce the complexity of the regulatory framework, address "excessive variability" in the capital requirements for credit risk and improve comparability between banks.The paper said: "One of the lessons from the financial crisis is that not all credit risk exposures are capable of being modelled sufficiently reliably or consistently for use in determining regulatory capital requirements."The Committee also wants to adopt floors to ensure a minimum level of conservatism where the IRB approach remains available.And it plans to specify parameters for estimation practices to reduce the variability of risk-weighted assets.On the issue of the scope of IRB, the Committee proposes to remove the IRB approach for bank and other financial institution portfolios, large corporate portfolios and equity portfolios. These would be subject to the standard approach.It said: "It is difficult for banks to obtain reliable estimates of the probability of default for low-default exposures. This is because the lower the likelihood of default the more observations a bank needs to produce a reliable estimate."Banks, other financial institutions and large corporates are usually considered to be low-default exposures."The Committee would also remove the IRB approach for specialised lending that use banks' estimates of model parameters.The treatment of sovereign exposures is subject to a separate review.