Data hurdles

The risk management rumour mill has been buzzing in recent weeks with the story that US banking regulators have told the senior management of the country’s 30 largest banks that they will be expected to implement the advanced internal ratings-based (IRB) approach to calculating regulatory capital for their credit risk under the Basel II capital Accord.

New York Fed officials say, yes, obviously the top 30 banks are the ones we expect to be most likely to qualify for the advanced IRB approach. But they deny that there has been an official diktat issued, or that any behind-the-scenes arm-twisting is going on. They point out that the advanced IRB approach is designed to provide the most advantageous capital treatment for credit risk, so banks should want to implement it.

It’s a reasonable response and raises the question: assuming the approach