Australian banks heading for advanced IRB

Australia’s four major banks are making good progress in implementing strategies and systems for Basel II, with all four banks targeting the advanced internal ratings-based (IRB) approach, according to rating agency Standard & Poor’s (S&P).

“Indications at this stage are that the Australian major banks are among the most advanced in the Asia-Pacific region in terms of Basel II development, although they must contend with significant challenges if they are ultimately to achieve advanced IRB status under Basel II,” said Gavin Gunning, director of financial services ratings, speaking at S&P’s financial market conference in Sydney.

The major challenge, said Gunning, is to develop databases for commercial exposures, such as mortgage assets and corporate loans, which will require a firm commitment, both in terms of funding and resources, by the four banks – ANZ, Commonwealth Bank of Australia, National Australia Bank, and Westpac.

The IRB approach will allow sophisticated banks meeting stringent regulatory criteria to calculate their own risk capital weights. Under the advanced model, banks will be able to use probability of default and loss-given default data derived from their own internal models – so long as the banks have sufficient credit history.