NEW YORK, December 19, 2002—The International Swaps and Derivatives Association (ISDA), RMA-The Risk Management Association, and the British Bankers Association (BBA) today launched a survey of the validation of banks' internal credit ratings, a key element underlying the Internal Ratings-Based (IRB) approach in the New Basel Capital Accord.
The Survey will examine validation processes for specific asset classes covered in the New Accord, including corporate exposures, specialized lending, small- and medium-sized entities, bank exposures, retail, and sovereigns. It will be conducted interactively through Web-based technology and through participant interviews. Survey participants will complete the questionnaires during January. The results and a list of participating organizations will be available in April 2003. PricewaterhouseCoopers designed and are consultants to the Survey.
The Associations decided to undertake the Survey after the Basel Committee on Banking Supervision, in its Second Consultative Package, set out the minimum requirements financial institutions must meet in order to use the IRB approach. One of the requirements will be for banks to demonstrate their capabilities to validate their estimates of default probabilities and the techniques used to assign internal ratings. Specific standards for validation, however, will be left to the discretion of national regulators. The Survey is intended to provide guidance to regulators and the industry in this area of New Accord implementation.
The Survey, which has the active support of major financial institutions and has been encouraged by leading financial regulators, will not recommend the adoption of specific methodologies or standards. Instead, the information gained through this research will provide financial institutions and regulators a better understanding of the range of validation techniques in use and how to implement them. The results will benefit financial institutions by facilitating the sharing of knowledge about current validation techniques and providing a benchmark to global industry practice; they will benefit national regulators by providing an overview of the diversity of techniques among institutions in various countries. Further, the information should help avoid the adoption of inflexible or overly prescriptive standards that could lead to reduced incentives for continued innovation and improvement of existing methods and models.
About ISDA
ISDA is the global trade association representing leading participants in the privately negotiated derivatives industry. ISDA was chartered in 1985, and today has more than 590 member institutions from 46 countries on six continents. These members include most of the world's major institutions that deal in privately negotiated derivatives, as well as many of the businesses, governmental entities and other end users that rely on over-the-counter derivatives to manage efficiently the financial market risks inherent in their core economic activities. Information about ISDA and its activities is available on its Web site.
About RMA
RMA is a member-driven professional association whose sole purpose is to advance the use of sound risk management principles in the financial services industry. Founded in 1914, RMA's historical focus on credit risk has broadened in recent years to examine risk management on an enterprise-wide scale, covering market risk and operational risk as well as credit risk. Headquartered in Philadelphia, RMA's membership is comprised of 3,000 financial institutions worldwide. More than 16,000 commercial loan, credit, and risk management professionals are individual members of RMA throughout North America, and in London, Hong Kong, and Singapore.
About BBA
The British Bankers' Association (BBA) is the leading trade association in the banking and financial services industry representing banks and other financial services firms operating in the UK. It has 295 members, as well as many associate members, which fund its not-for-profit activities.