On April 1, 2016, the Basel Committee on Banking Supervision published a second report on banking book risk- weighted asset valuation. The report forms part of the Regulatory Consistency Assessment Programme with the aim of effecting full implementation of the Basel III framework. The Committee's first report in 2013 focused on probability of default and loss-given-default-estimates for sovereign, bank and corporate exposures. This second report examines the variability of RWA in banks that use internal models to calculate their risk regulatory capital requirements. The report is focused on two areas of risk estimates: RWA variability in retail and small and medium-sized enterprise banking books; and variability in estimates of exposure at the time of default across the entire banking book. A major objective of the report is to identify the main drivers of RWA variation and evaluate their effects. The approach taken to explore RWA variation in retail and SME is described as a backtesting (or benchmarking) study that attempts to establish whether bank Internal Ratings Based estimates have a reasonable relationship to actual default and loss outcomes. The other primary objective is to highlight potential modification of current standards, either to reduce practice-based RWA variation or to simplify the IRB capital framework and increase its comparability. Under Basel II banks are required to have strong systems to validate the accuracy and consistency of rating systems, processes and the estimates of all relevant risk components in IRB models. The report outlines practices relating to banks' independent model validation functions. These practices are broken down into the areas of governance, methodology and scope of banks' validation functions and the role of validation across different phases of model development and implementation.
The Second Report is available at: http://www.bis.org/bcbs/publ/d363.pdf and the First Report is available at: http://www.bis.org/publ/bcbs256.pdf.
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