Summary of responses received on the report 'Credit Risk Modelling: Current Practices and Applications'

Background

In April 1999, The Basel Committee on Banking Supervision published a report, prepared by the Basel Models Task Force, entitled "Credit Risk Modelling: Current Practices and Applications". This report analysed current practices and issues in credit risk modelling and assessed the potential use of credit risk models for supervisory and regulatory purposes. The report concluded that "credit risk modelling may indeed prove to result in better internal risk management, and may have the potential to be used in the supervisory oversight of banking organisations. However, before a portfolio modelling approach could be used in the formal process of setting regulatory capital requirements for credit risk, regulators would have to be confident not only that models are being used to actively manage risk, but also that they are conceptually sound, empirically validated and produce capital requirements that are comparable across institutions. At this time, significant hurdles, principally concerning data availability and model validation, still need to be cleared before these objectives can be met, and the Committee sees difficulties in overcoming these hurdles in the timescale envisaged for amending the Capital Accord."

The report went on to set out current practice in credit risk modelling, based on a survey of 20 large international banks in 10 countries. Technical aspects of modelling were examined and the modelling issues that they raised were discussed. Comments from interested parties were sought by 1 October 1999.