r espectively, for all sub-classes. T he reference to the application of the default
E C B • T h e N e w Ba se l C a p i t a l A c c o r d • A u g u st 2 0 0 3
8
ascer tain the r elative significance of the exposur e. Fur ther mor e, the data used in
or der to deter mine the banks’ own estimates Pr obability of D efault, Loss G iven D efault
and Exposur e At D efault may be r elevant at the gr oup level but not at the local level.
H ence, it may be useful to ensur e the r elevance of the char acter istics of the own
estimates by imposing the condition that banks’ own estimates used locally should
r eflect local char acter istics. T her e seems to be an imbalance between the
exhaustive but necessar y list of minimum r equir ements that banks should comply with
in or der to be eligible for the IRB appr oach par agr aphs 349 to 500 and the assessment
and action to be taken in cases of non-compliance. W ith r egar d to the latter ,
only ver y gener al r efer ences to situations that might lead to super visor y action,
using phr ases such as “not in complete compliance”, “timely r etur n to compliance
plan” and “duration of non-compliance”, are found in a single paragraph paragraph 355.
M or e guidance on these issues would pr omote consistent implementation.
Alter natively, the AIG should addr ess these issues.
T her e ar e some elements of the pr oposals that make sense fr om a functional point of
view to ensur e that banks’ pr actices ar e pr oper ly taken into account when laying
down the r ules on compliance with minimum requirements. H owever, these elements need
enhanced monitoring to ensure a level playing field and a pr udent outcome when estimating
capital char ges. Against this backgr ound, the permission for banks to use human judgement
to cor r ect the r ating outcome of cr edit scor ing models par agr aph 379 or to
over r ide the outputs of the r ating pr ocess par agr aph 390 is welcomed as a potential
means to impr ove the over all pr ocess. In this context, a r efer ence would be welcomed to
the need for a per iodic r eview by inter nal andor exter nal auditor s of the pr actices of
banks wher e human judgement has been allowed to over r ide the r ating gener ated by
the model. In addition, banks should be r eady to demonstr ate pr udent use of human
judgement in their models’ r atings whenever requested to do so by supervisory authorities
or in the context of per iodic r eviews. T he time hor izon used in pr obability of
default PD estimations is set at one year par agr aph 376. A r efer ence to the fact that
the BC BS will monitor developments in r isk modelling and banking pr actice with r espect
to the assessment horizon would be desirable. A sentence could be added in the text stating
that the BC BS may r evisit its r equir ements on the assessment hor izon. T his would also
put the afor ementioned r efer ences to pr udent PD valuations into context.
T he use of str ess tests par agr aphs 396 to 399 is welcomed as a step towar ds ensur ing
capital adequacy under adver se economic, mar ket and liquidity conditions. T he EC B
would suppor t a r efer ence to the fact that, in addition to the alr eady mentioned follow up
at the national level par agr aph 399, the BC BS will monitor developments in the field
of str ess tests and may come up with mor e concr ete guidance, if r equir ed. In the same
vein, an explicit r efer ence to the r esults of str ess tests could be made in the context of
the inter nal r ating r epor ting to senior management paragraphs 401 and 402, section
on corporate governance and oversight. T he pr oposed tr eatment of specialised
lending and its five sub-classes par agr aphs 187 to 196, 218 to 220 and 244 to 253,
although detailed, seems to leave open issues such as the assessment of r estr uctur ing by
banks in distr essed situations, which may in tur n have level playing field implications as
the r isk weights of the “weak” and “default” categor ies differ significantly 350 ver sus