The consultative document about reducing variation in credit risk-weighted assets and its constraints on the use of internal model approaches gives insight into the Committee’s proposed alternations. The changes are mainly focused on the advanced internal ratings-based approach and the foundation internal ratings-based approach.
A number of proposed changes to this approach include complementary measures, which aim to diminish the often complex regulatory framework, improve its correlation and address inordinate variability in the capital requirements for credit risk. Specifically to this change the Basel Committee set out the following adjustments:
- • Remove the IRB approaches option for certain exposures, because the approaches’ parameters cannot adequately and accurately estimate regulatory capital purposes
• Maintain exposure-level, model-parameters floors to establish a minimum level of conservatism for portfolios where the IRB approaches remain available
• Reduce variability in risk-weighted assets (RWA) for portfolios where the IRB approaches remain available by equipping parameter estimation practices with stronger specifications
The Committee has previously consulted on the design of aggregate capital floors based on standardised approaches and is still considering the design and calibration. This would complement the proposed constraints discussed in this consultation paper.