Risk managers defend IRB against Tarullo criticism

Banks insist credit risk approach can be fixed - and remains more sensitive than stress tests

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The models banks use to calculate capital for their loan books are complex and opaque; they can be gamed, offer little insight into bank balance sheets, do little for market discipline, and are both pro-cyclical and blind to tail risk – or so says Daniel Tarullo, one of seven Federal Reserve Board governors.

In a speech on May 6, Tarullo argued the 13-year old internal ratings-based (IRB) approach fails on pretty much every level, and said the industry would be better served by a combination of

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