Although progress to date is significant, RMA—The Risk Management Association believes further revisions are necessary to regulate banks on an international level.
Philadelphia, Pa (June 15, 2001)- In its latest response to the Basel Committee on Banking Supervision (BIS), RMA said the framework as outlined in the January 16, 2001 Consultative Document must change considerably to achieve its stated goals of aligning regulatory capital with underlying risk.
RMA believes that the BIS has made great progress toward making the Accord more risk-sensitive, said RMA president and CEO Maurice Hartigan in a May 31, 2001 letter to the Committee. However, he informed the Committee that RMA had a number of objections to the January 16 proposal. "The banking industry has made enormous progress over the past decade toward quantifying risk exposures to absolute capital levels," wrote Hartigan. "A regulatory capital framework that is overly rigid could discourage further development of best practice procedures at institutions with advanced risk management systems."
He also pledged that the RMA Capital Working Group would continue working with members of the Committee to produce a final outcome of the reform process that aligns regulatory capital requirements to the risk profile position of individual institutions.
The Basel Committee on Banking Supervision released its Consultative Paper on a New Capital Adequacy Framework in June 1999. After receiving public comment on the proposal, it issued a revised proposal on January 16, 2001, which allows advanced-practice institutions to use an internal risk-based (IRB) approach for determining capital requirements.
RMA's Capital Working Group strongly recommended that such an approach be allowed for determining regulatory capital in its March 30, 2000 response to the June 1999 Consultative Paper. RMA's Capital Working Group, formed in December 1999, provided the Basel Committee with an analysis of how institutions use their IRB systems to assign capital. RMA conducted survey research to show how economic capital is allocated for a hypothetical asset with a one-year duration, based on two dimensions-probability of default (PD) and loss given default (LGD). RMA's initial response to the June 1999 Consultative Paper helped convince the international regulatory agency to accept an internal risk-based approach for setting capital requirements.
To date, RMA has provided the Basel Committee with eight papers discussing various issues surrounding the economic capital allocation process. Access to all of the papers is available on the What' s New page of RMA's Web site or by clicking on the "RMA's Basel Response" button at the top of this page.
RMA is the only financial services association that specializes in promoting effective credit risk management practices across the entire financial services industry. Its membership consists of more than 3,000 financial service providers. These institutions are represented in the association by more than 18,000 commercial loan, credit, and risk management professionals in 50 states, Puerto Rico, Canada and numerous foreign cities, including Hong Kong, Singapore and London. For more information, call Pam Martin, Director of Regulatory Relations and Communications, at 215-446-4092.